14 - THE FOREIGN-EXCHANGE MARKET

Abstract

This chapter provides an overview of the foreign-exchange market. The exchange rate converts values from one currency to another. Exchange-rate differences do not mean that one country is better or stronger than another but only that they measure value on a different scale. Shifts in exchange rates produce winners and losers. Cheaper imports benefit consumers when the dollar appreciates, but import-competing firms are hurt and exports fall. The demand for foreign currency is derived from the demand for foreign goods. Exchange-rate movements affect import prices and so influence the quantity of imports demanded. The demand for foreign exchange rises and falls with the demand for imported goods. The supply of dollars on foreign-exchange markets comes from the U.S. demand for foreign currency. Fixed exchange rates are an alternative exchange system. Fixed rates impose discipline and add certainty to international deals. Flexible rates are favored by some for their automatic adjustments.