Short-Run Exchange Rates Are Determined by Supply and Demand

Like any other price in local economies, exchange rates are determined by supply and demand — specifically the supply and demand for each currency. But that explanation is almost tautological as one must also know we need to know what determines the supply of a currency and the demand for a currency.

• The supply of a currency on a foreign exchange market is determined by the following:
• Demand for goods, services, and investments priced in that currency.
• Speculations on future demands of that currency.
• Central banks occasionally buy up foreign currency to affect the exchange rate.