Foreign exchange market

Foreign exchange market

• A market in which various national currencies are exchanged for another
• Exchange rates: equilibrium prices in the markets

Two point

•  A competitive market:  real world foreign ecxchange market characterized by large numbers of buyers and sellers dealing in standardized products such as euro, yen, and dollar
•          Linkages to all domestic and foreign prices: Market price or exchange rate of a nation's currency is an unusual price that links all domestic prices with all foreign prices

Dollar-Yen Market

             U.S. firms exporting goods to Japan want payments in dollars, not yen

             The Japanese importers to those U.S. goods only possess yen, not dollars

            We then have a market in which "price" is in dollars and the "product" is yen

Depreciation and Appreciation

• Depreciation: the international value of the dollar has declined

             -When the dollar depreciates, demand increases and supply decreases

• Appreciation: the international value of the dollar has increased

            -When the dollar appreciates, demand decreases and supply increases