In: Economics
“Short-run pressures on market exchange rates result mainly from gradual changes in flows of international trade in goods and services or expectations?” Why?
When exports increase (and/or imports decrease), there is higher demand for domestic currency (and/or lower demand for foreign currency), which appreciates domestic currency (and depreciates foreign currency). So, exchange rate increases. Similarly, when exports decrease (and/or imports increase), there is lower demand for domestic currency (and/or higher demand for foreign currency), which depreciates domestic currency (and appreciates foreign currency). So, exchange rate decreases.
When people expect a currency to appreciate, they increase their demand for that currency and decrease the demand for other currencies, so the currency in higher demand appreciates (and the other currencies depreciate). Similarly, when people expect a currency to depreciate, they decrease their demand for that currency and increase the demand for other currencies, so the currency in lower demand depreciates (and the other currencies appreciate).