Changes in currency exchange rate may occur due to changes in demand and supply. In case of a demand and supply graph, the price of a currency, say Sterling, is expressed in terms of another currency, such as the $US.
When exports increase, it would shift the demand curve for Sterling to the right and the exchange rate will go up. As shown in the following graph, originally, one Pound was bought at $1.50, but now it buys $1.60, hence the value has gone up.
Note − The world’s three most common currency transactions are exchanges between the Dollar and the Euro (30%), the Dollar and the Yen (20%), and the Dollar and the Pound Sterling (12%).
