Demand and Supply

Exchange rates respond directly to all sorts of events, both tangible and psychological

* Business cycles;
* Balance of payment statistics;
* Political developments;
* New tax laws;
* Stock market news;
* Inflationary expectations;
* International investment patterns;
* And government and central bank policies among others.

At the heart of this complex market are the same forces of demand and supply that determine the prices of goods and services in any free market. If at any given rate, the demand for a currency is greater than its supply, its price will rise. If supply exceeds demand, the price will fall.

The supply of a nation’s currency is influenced by that nation’s monetary authority, (usually its central bank), consistent with the amount of spending taking place in the economy. Government and central banks closely monitor economic activity to keep money supply at a level appropriate to achieve their economic goals.

Too much money è inflation è value of money declines è prices rise.
Too little money è sluggish economic growth è rising unemployment.

Monetary authorities must decide whether economic conditions call for a larger or smaller increase in the money supply.