The Foreign Exchange Market
Introduced| English | Meaning |
|---|---|
| foreign exchange market/ˈfɒrən eksˈtʃeɪndʒ ˈmɑːkɪt/ | A market in which one currency is exchanged for another. |
| equilibrium exchange rate/ˌiːkwɪˈlɪbrɪəm eksˈtʃeɪndʒ reɪt/ | The exchange rate at which the quantity of a currency demanded equals the quantity supplied in the foreign-exchange market. |
| exports/ˈekspɔːts/ | Goods and services sold to buyers in other countries. |
| assets/ˈæsets/ | Resources owned or controlled by a person or organisation that are expected to provide value or future benefits. |
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.
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The foreign exchange (forex) market.
Demand for US dollars comes mainly from:
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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:
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Residents offer dollars to obtain foreign currency.
Where supply meets demand is the ______ exchange rate.
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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:
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Foreigners need more dollars to buy the exports, raising demand.
Anything that raises demand for a currency tends to make it appreciate.
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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.
Write from 12 billion more dollars demanded
- Foreign buyers need 12 billion more dollars to pay for a jump in US exports.
- Say what happens to the dollar.
A jump in US exports means foreign buyers need 12 billion more dollars. What happens to the demand for dollars and to the dollar's value?
Foreigners must buy dollars before they can pay US exporters.
What does the export jump do?
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More exports mean more demand for the dollars that pay for them.