Currency & exchange rates

[ActEder]

Hi, could someone help me on this topic and explain what it means for a currency to weaken and strenghten and why? Which way does the exchange rate go in each case? Appreciation and depreciation of currency is used aswell but this area confuses me.

 

[Aditya mohan mathur]

Firstly, the exchange rate is decided by the point where the demand and supply curves of a currency intersect.

Now, when the demand for currency increases ( assuming supply remains same in the market) , the currency appreciates.
This can be understood from a graph also and logically also. This can also be seen as strengthening of the currency.

Similarly, we can understand that-
1) when demand decreases, currency depreciates or weakens
2) when supply increases, the currency depreciates
3) when supply decreases, currency appreciates.

The central bank of a country can take measures to alter the currency value by increasing or decreasing it's demand and supply.
To increase the demand, it can buy the currency from the people and vice versa.
This can also be done for the foreign currency.

Hope this helps.

 

[Charlie]

Just to add to that ...

If the pound:dollar exchange rate moves from £1 = $1.50 to £1 = $2, then this represents a strengthening of the pound against the dollar. It means that each pound can buy more dollars (so the pound has greater "power" compared to the dollar than it used to and is therefore stronger).

 

[ActEder]

Thank you both, this helps. Thinking of purchasing power of the currency is good I think.