Current account and currencies

Account balances are important because they can influence the value of that country’s currency. A currency has a direct impact on trade flows because it affects the price of goods and services, both domestic and foreign. If a country has a positive account balance, it is receiving more “inflows” in the previously cited categories than it is sending out of the country. One of the dangers of having a negative account balance is that it could lead to a drain on the country’s currency,
as native money will be leaving a country to pay off the deficit.

When the value of a currency increases, that currency is worth more in foreign countries. This has the effect of lowering the price of foreign goods and services
and encouraging imports. On the other hand, a falling currency makes foreign goods and services more expensive and discourages exports. In general, a large account deficit will lead to a decline in a country’s currency, as a cheaper dollar is necessary to attract foreign investors. Likewise, when demand for a country’s
assets begin to wane, the country’s currency falls, which discourages demand for imports and increases demand for exports.