Final answer:
Trade affects exchange rates through a current account surplus causing currency appreciation, a trade deficit leading to currency depreciation, and the import-export balance determining exchange rate fluctuations.
Step-by-step explanation:
Trade in goods and services can affect exchange rates in several ways. A high volume of exports relative to imports can lead to a current account surplus, which often causes the value of a country's currency to appreciate. Conversely, a situation where imports exceed exports, known as a trade deficit, can result in the depreciation of the domestic currency. Additionally, an import-export balance is crucial for determining the exchange rate movements; a balanced trade mitigates the impact on exchange rates, while an imbalance can cause them to fluctuate more significantly.
For example, if a country is experiencing a current account surplus due to high exports, it can result in an increased demand for the country's currency as foreign buyers convert their currency to purchase these goods or services. This demand can cause the currency to appreciate. On the other hand, a trade deficit might increase the supply of the domestic currency on the foreign exchange market as the country needs more foreign currency to pay for its imports, potentially leading to depreciation.