Currency Market
The U.S. Dollar and Coins (the Currency) is issued by the Federal Reserve and printed by the U.S. Treasury Dept. It is the cash and coins that are used to buy and sell products in this country, but what about for the rest of the world. Every other country does the same thing, the other countries also issue money though their own Central Banks (like the Royal Bank of Canada and the European Central Bank) and then the money is used in those countries.
A country can pick different type of Exchange Rate system. One of the popular ones is a FLOATING EXCHANGE RATE SYSTEM, which is system where the value of the currency is based on the Supply and Demand for the currency. The Currency market exists so that countries, individuals and companies can trade one currency for another currency. The price of one currency for another currency is called the EXCHANGE RATE. The price of one currency is ALWAYS compared to another currency. So the price of one U.S. Dollar is 1.2 Euros or 120 Japanese Yen or 10 Mexican Pesos.
If there is an increase in the Demand for one currency, then the Value of the Currency will rise (against other currencies) and The Exchange Rate will become STRONGER, which is called an APPRECIATION of the Dollar. A DEPRECIATION of the Dollar would occur if the Dollar becomes weaker against other currencies.
There are many reasons that the U.S. Dollar will Appreciate or Depreciate, the following table lists some main reasons for it.
Currency Market
| Stronger Exchange Rate ?Dollar Appreciate
(Increase in Demand for U.S. Dollars) |
Weaker Exchange Rate – Dollar Depreciate (Sell U.S. Dollars, Increase in the Supply of Dollars) |
| Increase Tourism into the U.S. | Tourism aboard |
| Increase in Domestic Investments | Increase in Foreign Investments |
| Increase in U.S. Interest Rates ? foreign investors save money in the U.S., buy $. | Increase in foreign Interest Rates,? U.S. investors save money in other countries ? sell $. |
| Exports | Imports |
| Confidence in the Economy | Weakness and/or lack of confidence in economy |
Another Exchange Rate System is based on the FIXED EXCHANGE RATE SYSTEM. How is the Exchange Rate of one currency determined in this system? The country sets the exchange rate for their currencies compared to other currencies and the rate is fixed. The government might want to set the rate to avoid the market effect on their currency and protect themselves from the changes in exports and imports that might occur. The Problem with choosing such a system is that the currency usually becomes over-valued, it worth less on the market than what the government has set as the value of the currency.
The Exchange rate has an effect on the Imports and the Exports also. When the exchange rate becomes stronger than the Imports will become cheaper and therefore the purchase of imports will increase by the U.S. and Exports will become more expensive and therefore the purchase of exports will decrease. Therefore a Stronger Exchange Rate will lead to a bigger Trade Deficit or shrink the trade surplus. The U.S. has a Trade Deficit, which means that the U.S. is buying more from other countries (imports) than the other countries are buying from the U.S. (exports)
Currency Market
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