Speculation Alone: The Dollar Appreciates
Traders expecting a stronger dollar next quarter buy dollars today, shifting demand right and making the expected appreciation happen immediately.
Speculation Alone: The Dollar Appreciates
Foreign Exchange Market (USD)Traders expecting a stronger dollar next quarter buy dollars today, shifting demand right and making the expected appreciation happen immediately.
Equilibrium at Quantity of USD 80, Exchange Rate (foreign / USD) 1
Start at Equilibrium
The dollar market sits in equilibrium where the demand for dollars (D$) meets the supply of dollars (S$). The vertical axis reads foreign currency per dollar.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
Students predict what happens before the graph moves. No accounts, nothing graded.
Speculation Alone: The Dollar Appreciates, step by step
- 1
Start at Equilibrium
The dollar market sits in equilibrium where the demand for dollars (D$) meets the supply of dollars (S$). The vertical axis reads foreign currency per dollar.
- 2
Traders Bet on a Stronger Dollar
Forecasters start predicting that the dollar will buy more foreign currency next quarter. Anyone who buys dollars now and sells them later would pocket that gain, so traders want more dollars today at every current exchange rate. The demand for dollars shifts right. Expectations about the future move the market in the present, exactly as expected future prices do in a goods market.
- 3
The Dollar Appreciates Today
The new intersection is at a higher exchange rate, so one dollar buys more foreign currency and the dollar has appreciated. The equilibrium quantity of dollars traded rises as speculators take positions.
- 4
The Expectation Fulfills Itself
Nothing about US exports, imports, or current interest rates changed. The belief alone moved the exchange rate, and the dollar is stronger today because traders expected it to be stronger tomorrow. This is why currency markets can jump on a forecast or a central bank speech long before any real trade flow responds.
Where it ends up
Expected future appreciation raises the demand for dollars right now, so the dollar appreciates today and the quantity of dollars traded rises, which makes the expectation self-fulfilling.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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