Final answer:
Shortages of foreign currency held by a country can lead to trade imbalances, causing a decline in currency value.
Step-by-step explanation:
Shortages of foreign currency held by a country can lead to trade imbalances. When a country does not have enough foreign currency, it may not be able to pay for imports from other countries, causing a trade deficit. This can happen when a country attracts large inflows of foreign capital, but if those inflows suddenly turn to outflows, it can result in a decline in the country's currency and lead to a decrease in the demand for it, lowering the exchange rate.