How can trade deficits impact a country's currency value?

Trade deficits occur when a country imports more goods and services than it exports. When a trade deficit persists, it can lead to an oversupply of the country's currency in the foreign exchange markets since foreign buyers need that currency to pay for the exports. This increased supply of the currency can lead to a decrease in its value relative to other currencies, resulting in depreciation.

When a currency depreciates, it may initially make exports cheaper for foreign buyers, potentially stimulating export growth. However, if the trade deficit continues, the negative pressure on the currency may persist. A weaker currency can also lead to higher costs for imported goods, which might increase inflationary pressures within the economy.

This connection between trade deficits and currency value helps to explain why a trade deficit can lead to currency depreciation, aligning with the correct answer. The other options do not accurately reflect the economic relationship between trade deficits and currency value.