Foreign exchange market graph shifts

Currencies are bought and sold, just like other commodities, in markets called foreign exchange markets.

How currency values are established depends upon whether they are determined solely in free markets, called freely floating , or determined by agreements between governments, called fixed or pegged. Like most currencies, the pound has at times been both fixed, and floating.

After a period of floating, the pound joined the European Exchange Rate Mechanism ERM in , but quickly left in , and has floated freely ever since. This has meant that its value is largely determined by the interaction of demand and supply.

The supply of a currency is determined by the domestic demand for imports from abroad. The more it imports the greater the supply of pounds onto the foreign exchange market. A large proportion of short-term trade in currencies is by dealers who work for financial institutions.

The equilibrium exchange rate is the rate which equates demand and supply for a particular currency against another currency. If we assume the UK and France both produce goods that the other wants, they will wish to trade with each other.

Market Spot Exchange Rate. Money Management | ywegyrayeku.web.fc2.com

However, French producers require payment in Euros and the British producers require payments in pounds Sterling. Both need payment in their own local currency so that they can pay their own production costs in their local currency. The foreign exchange market enables both French and British producers to exchange currencies so that trades can take place.

The market will create an equilibrium exchange rate for each currency, which will exist where demand and supply of currencies equates.

Changes in the value of a currency like Sterling reflect changes in demand and supply. For example, an increase in exports would shift the demand curve for Sterling to the right and push up the exchange rate. Conversely, lower interest rates in one country relative to other countries leads to an increase in supply, as speculators sell a currency in order to buy currencies associated with rising interest rates.

These speculative flows are called hot money , and have an important short-term effect on exchange rates. CMA identifies considerable competition issues in its report into the UK retail banking sector.

The foreign exchange market

What trading options are available to the UK? The OECD presents its final package for reform of international tax rules.. OECD - reducing income inequality will boost growth..

Economics Online News Analysis Theory Comment. The market for foreign exchange Currencies are bought and sold, just like other commodities, in markets called foreign exchange markets.