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Understanding what causes exchange rates to change is essential for analysing international competitiveness, the balance of payments, and macroeconomic policy. This lesson examines the factors that influence the demand for and supply of currencies in the foreign exchange market.
The foreign exchange (forex) market is a global, decentralised market where currencies are traded. It is the world's largest financial market, with daily turnover exceeding $7.5 trillion (Bank for International Settlements, 2022). The market operates 24 hours a day across major financial centres: London, New York, Tokyo, Singapore, and Hong Kong.
The exchange rate is determined by the interaction of demand for and supply of a currency.
The demand for pounds sterling arises from:
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