When a country consistently experiences trade deficits, national income flows abroad, weakening the country's economic performance. To improve this situation, the government may need to devalue the national currency. A lower currency value effectively reduces export prices, enhancing the competitiveness of export products. Therefore, when a country's foreign trade deficit expands, it negatively impacts the country's currency, causing it to depreciate. Conversely, a trade surplus is favorable for the currency. Thus, international trade conditions are a crucial factor influencing foreign exchange rates. The trade friction between Japan and the United States fully illustrates this point. The US has experienced persistent trade deficits with Japan, leading to a deterioration in the US trade balance. To limit Japan's trade surplus with the US, the US government has pressured Japan to appreciate its currency. Meanwhile, the Japanese government has tried various means to prevent the yen from appreciating too rapidly to maintain favorable trade conditions.
The impact of a country's foreign trade situation on exchange rates demonstrates how the balance of payments directly affects a country's currency fluctuations. If a country has a balance of payments surplus, demand for its currency increases, and foreign exchange inflows rise, leading to an appreciation of the country's currency. Conversely, if a country has a balance of payments deficit, demand for its currency decreases, and foreign exchange inflows decline, resulting in a depreciation of the country's currency. Specifically, among the various items in the balance of payments, the capital account, in addition to the trade account mentioned above, has the most significant impact on exchange rate fluctuations. Trade balance surpluses or deficits directly influence the rise or fall of currency exchange rates. For example, an important reason for the decline in the US dollar exchange rate is the increasingly severe US trade deficit. In contrast, due to Japan's substantial trade surplus and favorable balance of payments situation, the yen's exchange rate has shown a continuously rising trend. Similarly, surpluses or deficits in the capital account directly affect currency exchange rate fluctuations. When a country has a large deficit in its capital account and other items in the balance of payments are insufficient to compensate, the country's balance of payments will show a deficit, leading to a decline in the exchange rate of its currency against foreign currencies. Conversely, it will cause an appreciation of the domestic currency.
Regarding Bitcoin, its influence on exchange rates and international trade differs significantly from traditional fiat currencies. A research paper by Dyhrberg (2016) titled "Bitcoin, Gold and the Dollar – A GARCH Volatility Analysis" explores the similarities between Bitcoin, gold, and the US dollar in terms of their hedging capabilities and reactions to good and bad news. The study found that Bitcoin possesses some of the same hedging capabilities as gold and can be used for risk management purposes. However, unlike national currencies, Bitcoin is not directly influenced by a country's trade balance or monetary policies. Its value is primarily determined by market demand, technological factors, and regulatory environments across different countries. The decentralized nature of Bitcoin means that it is not subject to the same economic forces that traditionally impact fiat currencies, such as interest rates or inflation. Instead, factors such as network adoption, mining difficulty, and overall market sentiment play a more significant role in determining its value. This unique characteristic of Bitcoin and other cryptocurrencies introduces new dynamics to the global financial system and international trade, potentially offering alternative means of value transfer and storage that operate independently of national economic policies.
