When supply and demand analysis is used to study the exchange rate, how is foreign exchange treated?
This is a great question in our current economic climate. As you probably know most countries now are printing a lot of money. For example, the Federal Reserve in the United States has been printing money for many years now and there are more dollars circulating than ever before. This has even given rise to the name "helicopter Bernake."
What is true of America is also true of other nations and central banks. China has been printing money as well. The ECB (European Central Bank) is no exception. The main strategy in the global slow down is to print money to help banks who made bad loans. The world is flooded with paper money.
The increase in all of this paper money makes the value of paper money less and less. We can say that nations are debasing the currency. This is why the dollars for many years now has been loosing value. There are just too many dollars around.
What complicates this picture is that the rest of the world seems to be doing the same thing. There is very little precedent for this. But the general principle from the point of view of a supply and demand is that the more of something the less it is worth.
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