Currencies are traded on the foreign exchange market, and the supply of a currency on that market will change over time. There are a few different organizations whose actions will cause a rise in the supply of the foreign exchange market: Export Companies, for example a South African farm sells the cashews it produces to a large Japanese firm. It is likely that the contract will be negotiated in Japanese yen, so the farm will receive its revenue in a currency with limited use outside of Japan.
Since the company needs to pay its employees in the local currency, namely the South African rand, the company would sell its yen on a foreign exchange market and buy rands. The supply of Japanese yen on the foreign exchange market will increase, and the supply of South African rands will decrease. This will cause the rand to appreciate in value (become more valuable) relative to other currencies and the yen to depreciate. Foreign Investors, for example a German automobile manufacturer wants to build a new plant in Canada.
To purchase the land, hire construction workers, etc. , the firm will need Canadian dollars. However most of their cash reserves are held in euros. The company will be forced to go to the foreign exchange market, sell some of its euros, and buy Canadian dollars. The supply of euros on the foreign exchange market goes up, and the supply of Canadian dollars goes down. This will cause Canadian dollars to appreciate and euros to depreciate. Foreign investment does not have to be in tangible goods such as land.
If German investors buy Canadian stocks, such as stocks listed on the Toronto Stock Exchange or purchase Canadian dollar bonds, there would be the same situation as above. Speculators, like the stock market, there are investors who try to make a living by buying and selling currencies. Suppose a currency investor thinks that the Mexican peso will depreciate in the future, so it will be less valuable than other currencies than it is now. In that case, she is likely to sell her pesos on the foreign exchange market and buy a different currency instead, such as the South Korean won.
The supply of pesos goes up and the supply of won goes down. This causes pesos to depreciate, and won to appreciate. Central Bankers, The central bank of the United States is the Federal Reserve. One of the responsibilities of the Fed is to control the supply, or the amount, of currency in a country. The most obvious way to increase the supply of money is to simply print more currency, though there are much more sophisticated ways of changing the money supply. If the Fed prints more 10 and 20 dollar bills, the money supply will increase.
When the government increases the money supply, it is likely some of this new money will make its way to the foreign exchange market, so the supply of U. S. dollars will increase there as well. A central bank will often directly increase the supply of money on the foreign exchange markets. Central banks like the Fed keep a supply of most (if not all) currencies in reserve and will often use them to influence the exchange rate. If the Fed decides that the U. S. dollar has appreciated in value too much relative to the Japanese yen, it will sell some of the U.
S. dollars it has in reserve and buy Japanese yen. This will increase the supply of dollars on the foreign exchange market, and decrease the supply of yen, causing depreciation in the value of the dollar relative to the yen. The Fed cannot do this as much as it would like, because it may end up running out of some currencies. As well, the Japanese central bank (named the Bank of Japan) could decide that the Fed is manipulating the price of the yen too much and the Bank of Japan could counteract the Fed by selling yen and by buying dollars.
Not surprisingly pretty much the same organizations that caused supply changes will cause demand changes: Import Companies, for example a British retailer specializing in Chinese merchandise will often have to pay for that merchandise in Chinese Yuan. So if the popularity of Chinese goods goes up in other countries the demand for Chinese Yuan will go up as retailers purchase Yuan to make purchases from Chinese wholesalers and manufacturers. Foreign Investors, as before a German automobile manufacturer wants to build a new plant in Windsor, ON, Canada.
To purchase the land, hire construction workers, etc. , the firm will need Canadian dollars. So the demand for Canadian dollars will rise. Speculators, if an investor feels that the price of Mexican pesos will rise in the future, she will demand more pesos today. This increased demand leads to an increased price for pesos. Central Bankers, a central bank might decide that its holdings of a particular currency are too low, so they decide to buy that currency on the open market. They might also want to have the exchange rate for their currency decline relative to another currency.
So they put their currency on the open market and use it to buy another currency. So Central Banks can play a role in the demand for currency. Supply and demand are often thought of as being two sides of the same coin. Here we see that this is the case, as in every transaction there is a buyer and a seller, or in other words, a demander and a supplier. In the 1990’s Tanzania had a floating exchange rate. In theory, governments need not worry about having to manage their balance of payments situation.
If the exchange rate is allowed to fluctuate freely any disequilibrium will automatically be restored to equilibrium. The need to resort to overseas borrowing to finance balance of payments deficits (adding to existing debt) is therefore less. The attention of government can then be focused on achieving other government objectives such as inflation, unemployment, economic growth and poverty reduction The economic recovery program announced in mid-1986 by President Ali Hassan Mwinyi has generated notable increases in agricultural production and financial support for the program by bilateral donors.
The World Bank, the International Monetary Fund, and bilateral donors have provided funds to rehabilitate Tanzania’s deteriorated economic infrastructure. Growth in 1991-97 has featured a pickup in industrial production and a substantial increase in output of minerals, led by gold. Recent banking reforms have helped increase private sector growth and investment. The main exports are coffee, cotton and cashew. The main imports are machinery and transport equipment, consumer goods and industrial raw materials. The mining and tourism industries are growing rapidly with the liberalisation of the economy.
The strong fiscal policy under the leadership of President Benjamin Mkapa have resulted in economical improvements and praises from international monetary organisations. The Tanzania economy has suffered several set-backs with severe destabilizing effects. They include the oil shocks. collapse of commodity prices, drought, break-up of the East African Community and the Uganda war. These shocks combined with a poor policy regime culminated in severe economic crisis in the early 1930s. Several adjustment measures were implemented since 1981 but by mid 1990 fiscal instability was still severe.
In early 1996, the Government committed itself to a programme monitored by the IMF and from September 1996 a three-year Enhanced Structural Adjustment Facility (ESAF) underpinned by a Policy Framework Paper (PFP). Tanzania has made significant progress in restoring macro economic stability. The Government recognises the need for a high growth to fight the nation-wide poverty. Sustained growth is necessary. While growth is necessary it is important that it is broad-based and centred on improving the livelihoods of the poor. The Government is committed to intensifying the macroeconomic progress achieved to-date.