Like most foreign exchange rates, the dollar/euro rate is a floating rate, which means it changes constantly depending on the quantity supplied and demanded for each currency in the market. The supply and demand for each currency is driven directly by all of the following factors EXCEPT:

Video: 4.1.B. P5-27 (Foreign exchange market)

Question

Like most foreign exchange rates, the dollar/euro rate is a floating rate, which means it changes constantly depending on the quantity supplied and demanded for each currency in the market. The supply and demand for each currency is driven directly by all of the following factors EXCEPT:

Video: 4.1.B. P5-27 (Foreign exchange market)

BlackTom AI · Accepted Answer

When considering what directly drives the supply and demand for a currency in the floating-dollar/euro market, we look at the forces that translate into market transactions in foreign exchange.
Option a: relative inflation. Higher inflation in one country tends to depreciate that country's currency relative to others because price levels rise and purchasing power erodes, prompting currency exchange flows. This is a classic direct driver of exchange rate movements.
Option b: firms trading goods. International trade flows—exports and imports—require currency exchanges, so the volume of trade directly affects currency demand and supply, making this a direct influence on the rate.
Option c: investors trading securities. Capital flows due to investment in bonds, equities, and other securities between countries create demand for foreign currencies or supply of domestic currency, which directly moves the exchange rate.
Option d: the actions of central banks in each country. While central banks influence monetary policy and can affect expectations, the immediate, direct determinants of the ongoing supply and demand in the FX market are the inflation differentials, trade flows, and capital/financial flows. Central bank actions are not a direct market transaction in the FX supply-demand framework themselves, and in the context of the question they are the exception among the listed factors.

FINANCE 351 Quiz 6 Foreign Exchange Markets and Exchange Rates

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