What economic principle determines the foreign exchange rate and what makes it change? This must start with the analysis of the foreign exchange market. The foreign exchange market, as its name implies, is a market for currency exchange in different countries. The exchange rate is determined here The foreign exchange market, like other markets, is mainly determined by two factors, one is the supply and demand of money, and the other is the price of national currencies, which is calibrated by each country's own units.

Although there are so many different transactions in the foreign exchange market, the basic principles of exchange rate determination are the same. Many economists tend to use the relationship between supply and demand to explain the activities of the foreign exchange market.

American economist Samuelson used the supply-demand curve to analyze the market decision of exchange rate. His example is the bilateral trade between the pound and the dollar. America's demand for pounds is due to the goods, services and investments Britain provides to America. America needs pounds to pay for these goods and services. The supply of pounds depends on the goods and services provided by the United States to Britain and the investment of the United States in Britain. The price of foreign exchange, that is, the exchange rate, is set at the point of balance between supply and demand.

The balance between supply and demand of foreign exchange determines the exchange rate of currency. This supply-demand relationship of foreign exchange exists in every currency, so the supply-demand relationship comes from all directions of the world, and this multilateral exchange determines the exchange rate of the whole world.