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Participants in the exchange rate market

The foreign exchange market does not involve the ultimate suppliers and demanders of foreign exchange literally seeking each other out. If Martina decides to leave her home in Venezuela and take a trip in the United States, she does not need to find a U.S. citizen who is planning to take a vacation in Venezuela and arrange a person-to-person currency trade. Instead, the foreign exchange market works through financial institutions, and it operates on several levels.

Most people and firms who are exchanging a substantial quantity of currency go to a bank, and most banks provide foreign exchange as a service to customers. These banks (and a few other firms), known as dealers , then trade the foreign exchange. This is called the interbank market .

In the world economy, roughly 2,000 firms are foreign exchange dealers. The U.S. economy has less than 100 foreign exchange dealers, but the largest 12 or so dealers carry out more than half the total transactions. The foreign exchange market has no central location, but the major dealers keep a close watch on each other at all times.

The foreign exchange market is huge not because of the demands of tourists, firms, or even foreign direct investment, but instead because of portfolio investment and the actions of interlocking foreign exchange dealers. International tourism is a very large industry, involving about $1 trillion per year. Global exports are about 23% of global GDP; which is about $18 trillion per year. Foreign direct investment totaled about $1.5 trillion in the end of 2013. These quantities are dwarfed, however, by the $5.3 trillion per day being traded in foreign exchange markets. Most transactions in the foreign exchange market are for portfolio investment—relatively short-term movements of financial capital between currencies—and because of the actions of the large foreign exchange dealers as they constantly buy and sell with each other.

Strengthening and weakening currency

When the prices of most goods and services change, the price is said to “rise” or “fall.” For exchange rates, the terminology is different. When the exchange rate for a currency rises, so that the currency exchanges for more of other currencies, it is referred to as appreciating    or “strengthening.” When the exchange rate for a currency falls, so that a currency trades for less of other currencies, it is referred to as depreciating    or “weakening.”

To illustrate the use of these terms, consider the exchange rate between the U.S. dollar and the Canadian dollar since 1980, shown in [link] (a). The vertical axis in [link] (a) shows the price of $1 in U.S. currency, measured in terms of Canadian currency. Clearly, exchange rates can move up and down substantially. A U.S. dollar traded for $1.17 Canadian in 1980. The U.S. dollar appreciated or strengthened to $1.39 Canadian in 1986, depreciated or weakened to $1.15 Canadian in 1991, and then appreciated or strengthened to $1.60 Canadian by early in 2002, fell to roughly $1.20 Canadian in 2009, and then had a sharp spike up and decline in 2009 and 2010. The units in which exchange rates are measured can be confusing, because the exchange rate of the U.S. dollar is being measured using a different currency—the Canadian dollar. But exchange rates always measure the price of one unit of currency by using a different currency.

Questions & Answers

objective of macro economic
saroj Reply
give the characteristics of good money?
Chok Reply
suppose that there is a positive aggregate demand shock. what graph most accurately show how this would affect the aggregate demand-aggregate supply model?
Shielyn Reply
ppf and ad/as
jax
PPF , AD/AS
Shubham
if there is advance technology in the fishing industry, how will this change in supply and demand
El Reply
yes
Shehazahd
increase Supply, since technology in fishing will increase the efficiency of fishing , higher productivity and thus lower per unit cost of production, which incentive producers to increase their supply. demand wise, not so sure. depends on what exactly is the advancement in tech.
samantha
how many types of natural rate of unemployment
Trina Reply
what is macro economic
muniira Reply
in the year 1933, Ragnar Frisch used the term macro
Ammu
factors that determine the country material standard ?
Serena Reply
population divide by gdp in currency analysis
Aniyikayekenny
what is the important of studying economics
Akurugu Reply
economics teaches you how to think not what think
umer
in order to know how our country operates and corporate with other countries based on the international marketing and to know how our economy is doing regarding incomes going in and out through exchange of goods and services,we have to study more about economics to gain more and better understanding
Betty
important studying economic is make a choice under the condition of scarcity
cafifo
is labour a intermediate good or final good
umer Reply
what is economics
Mahamed Reply
Economic is science, which Studies human behaviour and who they are earn and spend
Ammu
economics is the science which shows how can use scare resources among society
umer
economic is a science which study human behavior as a result relationship between ends at scarce means which have more than one use
Jovert
simply, economics is a science which studies human wants,
Saeed
Economy is knowledge of choice
Omid
how to derive the equation for the equilibrium level of national income in an open economy with no taxes
loise Reply
what is inflation?
Herry Reply
when price goes up with some shottime
umer
Give me 5 example for Macro economics
Neha Reply
1. Markets 2. Market Failure 3. Competition 4. Price Stability 5. Efficiency
Luyando
please can you explain markets and markets failure ?
Timothy
When we talk about Markets as an example of macroeconomics, we look at demand and supply in labor market.
Luyando
Then for market failures, we focus on market inefficiencies and failures such as the destruction of common goods due to economic systems that provide no incentive for their preservation
Luyando
Who is a discourage worker.?
Timothy
a discourage worker is simply a worker who stop looking for a job because he/she believe no job is available for them..
Joseph
sloping curve normal
Mirasol Reply
A normal sloping curve
Mirasol
State what happen to the aggregate supply curve for beef. The price of beef decrease
Mirasol
i think there is positive relationship between price n supply so as the price decreases the supply curve so decreases and vice versa
Dharani
quantity supply will decrease,less.profit for firms in a perfectly competitive market i guess
Joseph
yaa
Dharani
List two REASONS FOR LOW PRODUCTIVITY IN DEVELOPING COUNTRIES?
KHONAYE Reply
DESCRIBE WHY MARGINALISED GROUPS ARE NORMALLY AFFECTED FIRST DURING A RECESSION.I'M IN GRADE 11
KHONAYE
A normal sloping curve
Mirasol

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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