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Supply and demand

Prices (or exchange rates) are ultimately determined by the relative influence of the forces of supply and demand. If there is very high demand for a particular currency, its value would be expected to increase in relation to currencies that there is less demand for. On the other hand, if there is a desire among holders of a particular currency to dispose of that currency in exchange for another, its value is likely to decline in relation to other currencies.

The sources of supply and demand in the foreign exchange market were outlined in chapter 5; namely, banks, governments, money/investment managers, corporations, retail traders and speculators. We now come to the motivations behind the actions of these participants, although we’ve partly examined some of the more practical of these, such as those governing the commercial business of importers and exporters.


  

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