How does a trade balance deficit typically affect the value of a country's currency in the context of capital flows?

A trade balance deficit occurs when a country imports more goods and services than it exports. This situation means that more money is flowing out of the country to pay for these imports, which can lead to a decrease in the value of the country's currency. When investors see a trade deficit, they may worry about the country's economic health and decide to invest their money elsewhere, causing further decline in currency value. For example, if a country consistently imports more than it exports, foreign investors might sell their holdings in that country, leading to decreased demand for its currency. As a result, the currency could weaken, making imports more expensive and potentially worsening the trade deficit.