The forex is able to facilitate the receipt or payment of units of currency that are equal in value.īid Price-The price that a buyer is willing to pay for a unit of currency.Īsk Price-The price that a seller is willing to accept for a unit of currency.īid-Ask Spread-The difference between the bid and ask price. This market is a necessity because one unit of currency very rarely equals exactly one unit of another currency. This creates additional demand for dollars and leads to appreciation now.Below is a short list of some of the important terms pertinent to foreign currency exchange.Įxchange Rate-The value of one currency expressed in terms of another.įorex-The foreign exchange market (forex) is a global, decentralized, over-the-counter market for the trading of currencies and is the largest market in the world (followed by the credit market). If for some reason investors believe that the dollar will appreciate in one year, they will want to buy it now.
We are not sure which effect would be stronger but usually a growing economy is associated with an appreciating currency.Įxpected appreciation of the dollar. imports increase since Americans can buy more international goods and services and cause dollar depreciation. On one hand, that attracts foreign investment and causes dollar appreciation. goods, the demand for dollars declines, and the dollar depreciates. That leads to greater foreign investment into the U.S., greater demand for dollars, and dollar appreciation. increases its international purchases and investments, that creates additional supply of dollars and the dollar will depreciate. increases, this will create more demand for dollars, and the dollar will appreciate. Holding all else constant, if foreign investment in the U.S. Foreigners want to buy dollars when they:Īt the same time U.S.
when more people want to buy it and depreciates when the supply increases, i.e. The exchange rate appreciates when the demand for the currency increases, i.e.
We say that a currency is appreciating/depreciating relative to another currency if it takes more/less units of the other currency to purchase it. The exchange rate is the price of one currency expressed in units of another currency. What factors determine the exchange rates
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