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FAQ: In the day-to-day foreign exchange market what type of market participant demands the euro?

Q&A: In the day-to-day foreign exchange market what type of market participant demands the euro?

1. In the day-to-day foreign exchange market what type of market participant demands the euro? What type of market participant supplies the euro?

2. For few months, prior to your vacation trip to Germany, you find that the exchange rate for your U.S. dollar has decreased relative to the euro. If you were a U.S. citizen or resident, are you pleased?? Explain

3. Explain why a currency appreciation does not improve a nation’s balance of trade

Answer:

(1) Daily turnover in ForEx markets is over $ 4 trillion. About 40% of that, or $ 1.6 trillion is in euro trades.

http://en.wikipedia.org/wiki/Foreign_exchange_market

With a world annual GDP of about $ 61 trillion and so a daily GDP of about $ 0.16 trillion, the daily euro trade is about 10 times what is needed to actually buy the entire world GDP.

That means that at least 90% of the euro trades are for pure speculation – not for real hedging or use.

(3) If by “improve a nation’s balance of trade” you mean “increase exports and decrease imports”, the currency appreciation does not. But if you mean “bring exports and imports back into balance”, then when you have a trade surplus, it does improve the balance.

(2) If your currency is weaker, it means the other country’s products are more expensive.

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