I'm not sure what the origin of this line of discussion is, but it is now
pretty well accepted, even in mainstream international finance, that the
trading of currencies for the purposes of financing trade (yen for pounds
to buy British sweaters) is largely irrelevant in determining exchange
rates, at least for internationally traded currencies. The annual volume
of currency traded exceeds the world volume of international trade by a
factor of around 100. So whether the Japanese pay for their imports in
yen, dollars, pounds or marks has little bearing on the value of the yen.
As Jim says, most exchange rate models regard the supply of currency as
vertical. Price depends on shifts in demand, which can be caused by
changes in interest rates, liquidity preference, speculative beliefs. A
decline in exports can drive down the currency value if the decline is
interpreted by currency traders as a sign to sell. On the other hand,
massive trade deficits can be associated with an appreciating currency if
traders are generally bullish on the country -- look at the U.S.
Ellen Frank
>What happens is that Japanese pay Y to buy Pounds, using cash or check. The
>British get some Yen (or claims on Yen). The Pounds are then paid to
>British sweater manufacturers. The Japanese lose Yen (or now suffer from
>greater foreign claims on their Yen) but gain sweaters.
>
>If the amount of Yen doesn't not change (a vertical supply curve), and the
>demand for Yen falls (shift in demand), the exchange rate falls. (The
>number of Pounds needed to buy a Y falls.)
>
>Jim Devine [EMAIL PROTECTED] &
>http://clawww.lmu.edu/Departments/ECON/jdevine.html
>
>
