explain the changes in demand and changes in supply in exchange rate. with the help of diagram
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Answer:
There are numerous economic factors that determine the supply and demand for different currencies. Economic changes that alter the relative strength of different countries are major factors. The economic strength of the Japanese and German economies following World War II, for example, was behind the appreciation of those currencies. Government debt is also a contributing factor. If investors fear a country may default on its debt, they will drop their investments and switch them to another currency. Interest rates also cause shifts in capital accounts as investors move their assets from one currency to another, seeking higher returns. Speculators look for opportunities in foreign exchange markets and can sometimes influence price changes.
Foreign exchange markets operate around the world six days a week. On Monday morning (Sunday afternoon Eastern time) the foreign exchange market opens in Sydney, Australia. Exchanges continue to open around the world as the day moves along. For the remainder of the week there is a market open somewhere in the world until the U.S. markets close on Friday afternoon -- by this time, it's already Saturday in areas like Sydney. The forces of supply and demand operate between markets, assuring that the price of foreign exchange is equalized market-to-market.