Graph walkthrough · Macro · Foreign exchange market

European buyers want US goods

A boom in Europe raises purchases of American aircraft and software.

Quantity of the currencyExchange rate0DSE₀

Step 1 of 3 · Before the boom

This is the market for US dollars, priced in euros per dollar. The horizontal axis is the quantity of dollars traded and the vertical axis is the exchange rate. The market is at E₀.

The chain in words

  1. Step 1

    Before the boom

    This is the market for US dollars, priced in euros per dollar. The horizontal axis is the quantity of dollars traded and the vertical axis is the exchange rate. The market is at E₀.

  2. Step 2

    Demand for dollars shifts right

    European buyers must pay American firms in dollars. At every exchange rate, more dollars are wanted, so demand for dollars shifts right. At the old rate, dollar buyers outnumber sellers.

  3. Step 3

    The dollar appreciates

    The dollar appreciates. At the stronger rate, Americans buy more European goods and supply more dollars, a movement along supply. The market settles at E₁: a higher exchange rate and more dollars traded.

Takeaway. A rise in exports raises demand for the exporter's currency and makes it appreciate.

Draw it yourself

This shock: draw the graphUS interest rates riseAmericans holiday in EuropeUS inflation outpaces Europe

More on the foreign exchange market graph

Higher US rates lift the dollarAmerican tourists head to EuropeUS inflation weakens the dollarSpeculators expect the dollar to fall

Go deeper

Lesson: Trade & Exchange Rates

The walkthrough shows the chain. The lesson explains why each link holds, with worked examples and practice questions that remember what you get wrong.
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