Why does a trade deficit lead to the depreciation of a country's currency?

Question

On wikipedia it says: "A nation with a trade deficit will experience reduction in its foreign exchange reserves which ultimately lowers (depreciates) the value of its currency." Why does a reduction in the foreign exchange reserves lower the value of currency?

Answer 1

take it like this,
when no trade happens the foreign exchange reserves come down

an in order for the country to maintain its foreign exchange reserves, the country reduces the value of its currency (this makes more foreign country's invest in the country)

Answer 2

Trade deficits (or current account deficits) can rise rapidly if a country’s exchange rate appreciates significantly. A higher currency value will make foreign goods and services (G&S) relatively cheaper, stimulating imports, while domestic goods will seem relatively more expensive to foreigners, thus reducing exports. This means a rising currency value can lead to a rising trade deficit. If that trade deficit is viewed as a problem for the economy, the central bank may be pressured to intervene to reduce the value of the currency in the FOREX market and thereby reverse the rising trade deficit.

Answer 3

In theory this might be the case but in practise it would take so long that the trade deficit may have gone before this happens. In the shorter term exchange rates vary so that any gain that could be had by borrowing in a currency with a low interest rate and investing in a high interest rate are offset by the risk of a depreciating currency, again in theory. People can make money doing just that but it's risky so you have to be cleverer than me.
In practise speculators control exchange rates, they gamble on a very short term basis and are totally uninterested in long term deficits if they can see a short term profit.

Answer 4

replace fee is a cost of export and import products.There are 2 of them, a industry replace fee and a cost parity replace fee. Economists will evaluate the two rates to become conscious of wheather it is over or undervalued. The chinese language Yuan is undervalued. That make chinese language made products interior the U. S. low priced, and US made good in China so costly. This reason the outsourcing from theUS to China, and the outflow of foreign places investment from the U. S. to China.If the chinese language considerable economic corporation allowed the YUan to head freely, the Yuan industry fee would be apprecated. the cheap chinese language made product would be going to the top. it is termed honest commerce interior the eyes of human beings.

Answer 5

Look at it this way : when you spend more money that you make, you have a deficit.