- Appreciation
- Appreciation is a rise in the exchange rate of a currency, so that each unit exchanges for more of other currencies.
- Depreciation
- Depreciation is a fall in the exchange rate of a currency, so that each unit exchanges for less of other currencies.
What shifts demand and supply in a currency market
Can you name four things that shift the demand for or supply of a currency?
Pounds are demanded by foreigners buying UK goods and assets, and supplied by UK residents buying foreign ones. Each of these changes one side or both.
Higher interest rates than abroad make a country's assets pay more, so demand for its currency rises and supply falls.
Can you think of an example?
The Bank of England raises Bank Rate while the European Central Bank holds its rate, so eurozone savers buy pounds to hold UK bonds.
Faster inflation than abroad erodes what a currency buys, so demand for it falls and supply rises.
Can you think of an example?
UK prices rise much faster than eurozone prices, so UK goods become less competitive and fewer people want to hold pounds.
A belief that a currency will rise leads investors to buy it now, raising demand and cutting supply at once.
Can you think of an example?
A widely read forecast says the pound will strengthen next year, so traders buy pounds today and the pound rises straight away.
Foreign buyers of a country's exports demand its currency, and its importers supply it to buy foreign currency.
Can you think of an example?
A rise in demand for Scotch whisky in Europe means more euros are sold for pounds, and demand for pounds shifts right.