ABSTRACT

The demand for foreign exchange arises from the need to convert domestic currency into foreign currencies. Markets are principally found in leading financial centres such as London and New York and consist of market-makers, who are prepared to deal in foreign currencies. These market-makers comprise banks and brokers who are prepared to buy and sell foreign currencies from other banks, brokers, corporations, the general public and even governments. The depreciation of a currency will always increase the quantity of currency demanded. Central monetary authorities frequently intervene in foreign exchange markets to limit or prevent exchange rate adjustments which conflict with economic, social and even political objectives. Currencies are undervalued when their market demand exceeds their market supply. The foreign exchange market is affected by disturbances which, for individual currencies, may be of either domestic or foreign origin. Currencies are overvalued when their market supply exceeds their market demand.