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  • The Foreign Exchange Market, commonly abbreviated as Forex on the exam, is a cycle of currency depreciating and appreciating.

Appreciating and Depreciating Currency ⬆️⬇️  

  • its value rises against another currency 
  • depreciating currency is when its value goes down against another currency 
  • ex: 1 Euro = 1 USD 
  • Euro appreciates while the USD depreciates so 1 Euro = 1.2 USD

So how do we understand the cycle through the market? 🤨

...well, we utilize 2 graphs of the supply and demand of 2 different currencies

...well, we utilize 2 graphs of the supply and demand of 2 different currencies
 

The graph on the left shows the FOREX market for the U.S.🇺🇸, & the other shows for countries utilizing the Euro🇪🇺.

Important things to note 😲:

  • on the x-axis, we chose the home country's currency
  • on the y-axis, we set an exchange rate (a fraction) 
  • "what goes on the bottom goes on the bottom", so what you put for the x-axis will be the denominator while the numerator is a foreign country's currency            
  • the equilibrium exchange rate is where the demand and supply curves meet, for instance, 1 Euro= 1 USD in our made-up scenario

♾Cycle of depreciating & appreciating currencies.

  • Say 1 Euro could buy more goods than 1 USD in the U.S., 
  • The Euro is in a better standing to import goods from the U.S. into countries utilizing the Euro. 
  • European goods would be more expensive for Americans.

So, people in the European Union want to buy an American made truck 🚘. First, they would need USDs to make the purchase, so they would supply their currency, the Euro, to make the exchange.

This would shift the demand for USD & supply for Euro to the right. The movements are shown in red on the graphs.

*Demand of a currency is determined by a foreign country, while the supply is determined by the home country

  • through the graph, we can see a new exchange rate has been made, 2 Euros = 1 USD
  • Can you guess which currency depreciated and which one appreciated?
  • This here can sometimes confuse students, the highest # here is NOT the best, so the Euro actually depreciated because now it is worth fewer USDs than before
  • Before, 1 Euro could buy 1 USD. Now, 1 euro could only get 0.5 USD
  • The USD appreciated
  • This means goods in the U.S. would be more expensive for Europeans, so they would stop imports from the U.S.

🤔Wait! We don't stop here yet. The FOREX market is a cycle, so what does this mean for American consumers 🇺🇸?

Well now, goods in the European Union nations would be cheaper for Americans, so they would start importing goods from there.

So, Americans supply their currency to buy Euros to complete the transactions.

  • now, the USD has depreciated, and the Euro has appreciated
  • this would mean goods in America would be cheaper for those in the European Union
  • this causes the cycle of supplying, demanding, appreciating, and depreciating currency = IT NEVER STOPS 😔

Hope this helped. Till next time rêveur. 

Here is a Jacob Clifford clip that might help you: Video

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