4.5.2—Demand and supply for currencies

Currency demand rises when foreigners need the currency to buy exports, invest or visit. Currency supply rises when domestic residents buy imports, invest abroad or travel. Interest rates, income, inflation expectations and confidence can shift either curve.

For example, higher domestic interest rates may attract capital inflows and increase demand for the currency, but the effect depends on expected risk and future exchange-rate changes. Name the transaction before predicting a shift.

Use the full transaction map. Foreign demand for exports, inward FDI or portfolio investment and some inward remittances raise demand for the domestic currency; domestic import purchases, outward investment and outward remittances raise its supply. Speculation, relative inflation, relative interest rates, relative growth and central-bank intervention can shift either curve through expected returns and transactions. Calculate percentage appreciation or depreciation as $(\text{new rate}-\text{old rate})/\text{old rate}\times100$ only after fixing the quotation; the reciprocal quotation moves in the opposite direction by a different percentage.