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A Beginner's Guide to Exchange Rates and the Foreign Exchange Market
[Part 4: Exchange Rates - Demand]
 More of this Feature
• Part 1: Exchange Rates - What are they?
• Part 2: Exchange Rates - Arbitrage
• Part 3: Exchange Rates - Supply
• Part 4: Exchange Rates - Demand
• Part 5: Case Study: Canada - Introduction
• Part 6: Case Study: Canada - Commodity Prices
• Part 7: Case Study: Canada - Interest Rates
• Part 8: Case Study: Canada - International Factors

Why would the demand for a currency increase?

Not surprisingly pretty much the same organizations who caused supply changes will cause demand changes. They are as follows:

  1. Import Companies

    A British retailer specializing in Chinese merchandise will often have to pay for that merchandise in Chinese yuan. So if the popularity of Chinese goods goes up in other countries the demand for Chinese yuan will go up as retailers purchase yuan to make purchases from Chinese wholesalers and manufacturers.

  2. Foreign Investors

    As before a German automobile manufacturer wants to build a new plant in Windsor, ON, Canada. To purchase the land, hire construction workers, etc., the firm will need Canadian dollars. So the demand for Canadian dollars will rise.

  3. Speculators

    If an investor feels that the price of Mexican pesos will rise in the future, she will demand more pesos today. This increased demand leads to an increased price for pesos.

  4. Central Bankers

    A central bank might decide that its holdings of a particular currency are too low, so they decide to buy that currency on the open market. They might also want to have the exchange rate for their currency decline relative to another currency. So they put their currency on the open market and use it to buy another currency. So Central Banks can play a role in the demand for currency.

    Supply and demand are often thought of as being two sides of the same coin. Here we see that this is the case, as in every transaction there is a buyer and a seller, or in other words, a demander and a supplier.

    Now we know what agents can cause price changes and for what reasons. We can use our knowledge to analyze what happens in the "real world". An interesting case is the Canadian-to-American exchange rate. Due to the geographical proximity and economic intergration of the two countries the Canadian-to-American exchange rate is often examined. The sharp decline in the value of the Canadian dollar relative to the American one is widely discussed in the news, so we'll discuss it now.

Next page > Part 5: Case Study: Canada - Introduction > Page 1, 2, 3, 4, 5, 6, 7, 8.

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