Why Exchange Rates Change

What this unit covers

Connect exchange-rate moves to forces you have already met, interest-rate differences and foreign investor flows, now applied to currencies.

By the end you will be able to

• Explain that an exchange rate moves due to demand and supply, like any price.
• Identify how interest-rate differentials shift money and currency demand.
• Identify how FII flows change demand for a currency and its rate.

How it starts: A Number That Keeps Moving

1. You check the rupee against the dollar before moving some savings abroad.
2. It has moved against you since you last looked, weeks ago.
3. What made this number shift while you were not watching?

Words you will meet

Interest-rate differential

The gap between the interest rate one country offers and the rate another country offers.

FII flows

Money that foreign institutional investors move into or out of a country's markets.

In this module: Currency Markets

1. What Is Forex?
2. Major Currency Pairs
3. Why Exchange Rates Change (this unit)
4. Currency Futures & Hedging Basics