Determinants of foreign exchange rates

1. Price level in Mexico increases

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

1. Price level in Mexico increases the dollar appreciates the peso depreciates

2. Interest rates in Mexico increase

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

2. Interest rates in Mexico increase the dollar depreciates the peso appreciates

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

3. Interest rates in the US increase

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

3. Interest rates in the US increase the dollar appreciates the peso depreciates

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

4. Mexico’s real GDP increases

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

4. Mexico’s real GDP increases the dollar appreciates the peso depreciates

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

5. US government reduces taxes

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

5. US government reduces taxes the dollar depreciates the peso appreciates

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

6. Americans increase their demand for Mexican tomatoes

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

6. Americans increase their demand for Mexican tomatoes the dollar depreciates the peso appreciates

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

7. American investors feel the Mexican economy will grow

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

7. American investors feel the Mexican economy will grow the dollar depreciates the peso appreciates

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

8. American investors feel the Mexican economy is unstable

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

8. American investors feel the Mexican economy is unstable the dollar appreciates the peso depreciates

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

9. Mexican demand for US guns increases

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

9. Mexican demand for US guns increases the dollar appreciates the peso depreciates

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

10. American demand for cocaine shipped through Mexico increases

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

10. American demand for cocaine shipped through Mexico increases the dollar depreciates the peso appreciates

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

11. The US imposes a tariff on Mexican goods

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos

11. The US imposes a tariff on Mexican goods the dollar appreciates the peso depreciates

Quantity of Dollars Quantity of Pesos

Pes

o /

dolla

r ex

chan

ge r

ate

Dol

lar

/ P

esos

exc

hang

e ra

te

S

D D

S

The Market for Dollars The Market for Pesos