Scott J_ Jenkins#64

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What is the role of trade balances in forex valuation?

Trade balance measures exports minus imports. A surplus strengthens currency as foreign buyers must purchase the local currency for goods. A deficit weakens currency due to outbound flows. For example, Japan’s yen historically gained support from strong exports. Institutions track trade balances as part of macro valuation models. Retail traders can use balance shifts as early signals of long-term trends. Benefits: trade balance reflects real demand for currencies. Risks: financial flows sometimes outweigh trade—U.S. maintains deficits yet USD remains strong due to reserve status. Trade balances matter, but must be weighed alongside capital flows and interest differentials.