Prices and Exchange Rates

Readers Question: Prices fall due to a fall in demand. How does it affect the exchange rate? What’s the link between fall in prices and exchange rate?

A currency may fall in value if there is less demand for that currency.

The value of a currency is determined by supply and demand factors. If there is more demand for the dollar and less supply of the dollar, the value of the dollar will increase.

An example, if Country A had a higher rate of inflation than elsewhere then goods in that country would be less attractive. It would sell less exports and therefore, there would be less demand for its currency. This would cause a fall in the value of the exchange rates.

• The Pound has been falling in recent months, because the deteriorating economic situation has led to lower interest rates.
• The Dollar has been strong recently, because many hedge funds have been selling their oversees assets (due to concern over emerging economies) and converting them into dollars.

This video explains why the Pound has been falling.