Automatic adjustment in BoT

External question — Economics Stack Exchange Author: David Mills Original post: https://economics.stackexchange.com/questions/60988 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Suppose Country A operates under a floating exchange rate and suddenly develops a trade surplus with the US. Here is how I see the automatic adjustment mechanism working: Trade surplus with the US => Demand for Country A’s currency increases while the supply of USD in the market increases => Country A’s currency appreciates against the USD => Imports from the US become cheaper => Increased imports of US goods => Increased demand for USD (to pay for the imports) => The trade surplus shrinks toward a balance & USD appreciates against A I'm wondering: would the exchange rate also adjust in the way I described? Most of the articles I've read focus on how the trade balance would adjust (surplus -> equilibrium), but none of them mentioned how the exchange rate would adjust (A goes from appreciation to depreciation).