Sample Essay on Factors Affecting Demand and Supply of Currency

 Demand and Supply of Currency

Like the maxim goes “money makes world go round” every nation has its own currency that it relies on and trades out with for other essential commodities. Most of the traded currencies in the world include United States Dollar, Euro, Japanese Yen, Pound Sterling, Swiss Franc, Chinese Yuan and Mexican Peso to name but a few. Forex trading entails the exchange of currency with another. Exchange rate in many countries or markets is determined by supply and demand of currencies. However, there are core factors impacting demand and supply of currency to be well-versed with.

Different currencies are converted in varying ways and these helps determine the ability of an individual, company or government to transfigure is own currencies to other currencies for easier transaction and trade.  Exchange rates play a substantial role in a country’s relative level in the growth of economy. A higher currency impacts trade greatly.  For instance, higher currency makes a country’s exports more costly and imports low-cost in foreign markets.

Lower currencies are attributed with cheaper exports and more expensive imports in foreign markets. The laws of demand and supply are substantial when it comes to currency market. Essentially, currencies that are in high demand have a higher rate. In addition, currencies in higher supply come with reduced prices.  Besides all these, there are a number of factors that affect the demand and supply of currency. They include;


Lower inflation brings in a rising currency value as the purchasing power increases relatively to other currencies. Inflation depends on factor such as oil price changes and internal factors like politics climate and much more. In case of high inflation levels, the currency is likely to weaken.

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Interest rates

Whenever a country’s interest rates rises or falls higher than another country, the currency of the country with lower interest rate will be sold and the other currency will be purchase to achieve much higher returns. In case of high demand for currency with higher interest rate, the worth of the currency will rise against other currencies. Higher interest rates regardless of where you are making your transactions guarantee high capital flows.

Political instability

A country with a positive growth in economy will attract more investors. Nevertheless, a politically stable country impacts investors decisions and may lose confidence in the respective country’s currency.

Market judgment

Currency exchange rates are impacted by imperceptible factors such as emotions, analysis, judgment and understanding of the political and economic events. It is wise to always determine the market reaction before any information on currencies hits the market.

Government policies

Many governments globally come with varying policies that impact exchanges rates of currencies and trade in general. There are monetary policies that all traders or investors should stick to. The central bank always takes part in buying and selling of currencies in order to stabilize them at a realistic level.

Investors and traders should always understand how currency value and exchange rates work and figure out the essential role that they play in their investment and trade in general. It is exceptional great to keep the above-mentioned factors affecting demand and supply of currency in mind.  It is an easy way to build their confidence in the market.

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