Exchange Rates, Supply and Demand of Currencies

Currencies as part of Supply and Demand

• All major currencies of the world “float” on supply and demand markets. 
• Some minor currencies are “pegged” to other major currencies like the 
• US dollar and the Euro, 
• but rise and fall in value with those major currencies.
• The only major currency that is “fixed” in exchange rates by governmental decree is the People’s Republic of China’s Yuan.  
• The Chinese government does adjust the “fixed” rate occasionally, 
• most recently as a response to US pressure to balance trade issue flaws.
• Currencies either “appreciate” or “depreciate” in EP.

When changes occur between two countries’ economies, the currencies will reflect those changes:

• When other countries want something from us they are demanding dollars.

• When we want something from other countries we are supplying dollars.  

three rules of currency demand graphs 

• Always change the D line on one currency graph, the S line on the other currency’s graph.
• One currency will appreciate, the other will depreciate.
• Move the lines of the two currency graphs the same direction and you will end up with the correct answer.

How do currencies move?

1. Fads, tastes, and political actions like boycotts, occur in a country as it deals with another country.
2. The country with less inflation has the more attractive economy compared to a trading partner.
3. The country with better investment opportunities (higher real interest rates for investments) has the more attractive economy.
4. The country “expected” to improve its economic standing more quickly than trading partners will have the more attractive economy.
5. If the overall real wealth of one country improves, compared to the wealth of a trading partner, the improving country will have the more attractive economy.