Why does demand foreign exchange arise speculative activities? (2024)

FAQs

Why does demand foreign exchange arise speculative activities? ›

Demand for foreign exchange arises when people want to speculate on the value of foreign currency. Speculators demand foreign currency in the present period with the aim of selling it in future at higher prices.

i With a fall in price of foreign exchange the exchange value of domestic currency increases and that of foreign currency falls and foreign goods become cheaper in relation to domestic goods. The rising domestic demand of foreign goods implies higher demand for foreign exchange.

Forex Speculation

In the forex market, speculators capitalize on fluctuations in currency exchange rates. For example, a speculator might buy the EUR/USD pair, anticipating that the euro will strengthen against the U.S. dollar. If the euro does indeed appreciate, the trader could sell the pair for a profit.

When price of foreign exchange rises, becomes, cheaper for foreign buyers, because they can now buy more one unit of foreign currenct. As a result demand for exports rise, leading ot increases in supply of foreign exchange.

If many speculators sell the currency in the forward market, this will signal that the currency is overvalued, and people will begin selling the currency in the spot market. Eventually, the central bank will be unable to support the fixed exchange rate and the currency's value will fall.

Demand for foreign exchange arises when people want to speculate on the value of foreign currency. Speculators demand foreign currency in the present period with the aim of selling it in future at higher prices.

Speculative is used to describe activities which involve buying goods or shares, or buildings and properties, in the hope of being able to sell them again at a higher price and make a profit. Thousands of pensioners were persuaded to mortgage their homes to invest in speculative bonds.

Example: In the case of intra-day trading in shares, there is no actual delivery as the shares enter and exit from the trading account on the same date and it does not enter the DEMAT account at all. Therefore, actual delivery does not take place. Hence, they are called speculative transactions.

Speculation in the stock market involves making investments in assets that have a likelihood of loss. But there is the hope that the outcome will be the opposite—that there will be big gains. High-risk stocks tend to be speculative, especially penny stocks and those on the over-the-counter (OTC) market.

What happens when foreign exchange rate rises? ›

An increase in exchange rates reduces the balance of trade in a country by reducing exports and increasing imports. If a country's imports are valued higher than their exports, the country is said to have a trade deficit and a lower demand for their currency.

When foreign exchange rate rises imports become costly for the domestic consumers. This reduces demand for imports causing fall in demands for foreign exchange When foreign exchange rate falls opposite happens. Import become cheaper and in turn raising demand for foreign exchange.

Supply and demand dynamics: If there is an increased supply of a currency relative to its demand, its value can depreciate. Factors that influence supply and demand include changes in interest rates, economic conditions, political stability, and market expectations.

Speculators' Impact on the Market

If a speculator believes that a particular asset is going to increase in value, they may choose to purchase as much of the asset as possible. This activity, based on the perceived increase in demand, drives up the price of the particular asset.

Economic bubbles

The cycle is repeated – rising prices as a result of increased demand from speculators, followed by new buyers attracted by the rapidly rising prices increasing demand further, driving the market to even higher prices – until the bubble bursts and prices dramatically decline.

speculation noun [C or U] (GUESS)

the activity of guessing possible answers to a question without having enough information to be certain: Rumours that they are about to marry have been dismissed as pure speculation. Speculation about his future plans is rife.

Foreign exchange markets serve an important function in society and the global economy. They allow for currency conversions, facilitating global trade (across borders), which can include investments, the exchange of goods and services, and financial transactions.

When demand for the dollar increases then so does its value. Conversely, if the demand decreases, so does the value. The demand for the dollar increases when international parties, such as foreign citizens, foreign central banks, or foreign financial institutions demand more dollars.

Differentials in Interest Rates

Higher interest rates offer banks and other lenders a better return relative to other countries. Higher interest rates attract foreign capital and cause the exchange rate to rise.

A country's net exports or imports impact currency value and exchange rates. A domestic country that exports more goods than it imports will experience a higher demand for its currency, and thereby, will see its exchange rate increase relative to other foreign currencies.