Foreign Exchange Market [4/15]

1. capital/debit
2. capital/credit
3. official reserves/credit
4. current/debit 
5. current/credit
6. official reserves/debit

appreciation of currency occurs when exchange rate of that currency increase.
EX. 100 yen = $1 --> 200 yen = $1  the dollar is stronger

depreciation of currency occurs hen exchange rate of that currency decreases.

exchange rate determinants


consumer taste:

• ex. preference for jap. goods creates an inc. in demand of yen & inc. supply of $ in currency exchange market. 
• inc. in demand of yen lead to appreciation of yen
• inc. in supply of $ leads to the depreciation of $

relative income:

• imports tend to be normal goods. 
• ex. mex. econ. is becoming stronger & US econ is in recession, then mex will buy more.
• $ appreicates. 

relative price level:

• ex. price level in canada higher than in US, then american goods are cheaper. 
• canadians purchase more goods cause $ to appreciate. 

speculation:

• ex. if US expect that swiss interest rate go up, US demand for swiss francs in order to earn higher rate of return in switzerland. 
• swiss francs appreciate 
• supply of $ inc. cause depreciate.