The Foreign Exchange Market
| English | Chinese | Pinyin |
|---|---|---|
| foreign exchange market | 外汇市场 | wài huì shì chǎng |
| equilibrium exchange rate | 均衡汇率 | jūn héng huì lǜ |
| exports | 出口 | chū kǒu |
| assets | 资产 | zī chǎn |
Currencies have their own market
- Currencies are bought and sold in the foreign exchange market 外汇市场.
- We model it like any market: a downward-sloping demand curve and an upward-sloping supply curve.
- The "price" on the vertical axis is the exchange rate.
- The "quantity" is how much of the currency is traded.
Currencies are bought and sold in the foreign ______ market.
The foreign exchange (forex) market.
Demand for US dollars comes mainly from:
To buy US goods or assets, foreigners need dollars first.
Where demand comes from
- Demand for a country's currency comes from foreigners who need it.
- They need it to buy that country's exports 出口, or to invest in its assets 资产.
- Want American software or US bonds? You must get dollars first.
- More foreign buyers of US goods and assets → more demand for dollars.
Demand for dollars, or supply of dollars?
Demand for a currency comes from foreigners buying its exports or assets; supply comes from residents buying foreign goods or assets.
Supply of US dollars to the forex market comes from:
Residents offer dollars to obtain foreign currency.
Where supply meets demand is the ______ exchange rate.
The market clears at the equilibrium exchange rate.
Where supply comes from
- Supply of the currency comes from that country's own residents.
- They offer their currency to buy foreign goods and foreign assets.
- Americans wanting European cars supply dollars (to get euros).
- Where supply meets demand is the equilibrium exchange rate 均衡汇率.
A jump in demand for US exports will:
Foreigners need more dollars to buy the exports, raising demand.
Anything that raises demand for a currency tends to make it appreciate.
More demand at each rate pushes the equilibrium exchange rate up.
What makes a currency rise
- Anything that raises demand (or lowers supply) makes the currency appreciate.
- Anything that lowers demand makes it depreciate.
- Worked idea. The world suddenly wants more American software. Foreigners need dollars to pay, so demand for dollars shifts right. With supply unchanged, the equilibrium exchange rate rises — the dollar appreciates.
- Rising exports pull a currency up.
Currencies trade in the foreign exchange market. Demand comes from foreigners buying a country's exports and assets; supply comes from its residents buying foreign goods and assets. Their intersection is the equilibrium exchange rate. More demand (e.g. a jump in exports) shifts demand right and the currency appreciates.