Demand and Supply of Foreign Exchange influences the determination of exchange rates and vice versa. The demand for foreign exchange is inversely proportional to the rise of exchange rate. As the exchange rate goes up the demand for foreign exchange declines. The quantity of foreign exchange demanded falls. The supply of foreign exchange shifts depending on demand and not on the exchange rate. If the supply aspect of transaction is plotted on a graph it will be vertical since the supply of foreign currency deposits available at any time is fixed.
If the supply of a country’s currency increases the value of the currency decreases in relation to other currencies and more money is required to buy the foreign exchanges.
Foreign Exchange Market
The transaction of a currency takes place in the foreign exchange market. The supply of a currency depends on the ups and downs of the market. In the market large financial institutions and banks trade with money.
Factors Affecting Demand and Supply of Foreign Exchange
The supply and demand of foreign exchange depends on lots of factors. They are: