FEATURES OF THE FORMATION OF SUPPLY AND DEMAND ON THE FOREIGN EXCHANGE MARKET UNDER THE CONDITIONS OF A SOFT CURRENCY

Abstract

In accordance with the goal set by the author, the article develops a theoretical model of the interaction of supply and demand in the foreign exchange market of countries with a soft currency. This model can significantly improve the accuracy of exchange rate forecasting and the effectiveness of exchange rate policy, and therefore will be useful to participants in the FX market and monetary authorities. The article uses both general scientific and special research methods: dialectical, analysis and synthesis, abstract-logical, generalization, graphic-analytical. Western economics analyzes the currency market according to the standard Marshallian cross scheme, where the main factor influencing the dynamics of supply and demand is the ratio of interest rates. However, this model is only valid for a situation in which two hard currencies are traded. The article examines the FX market of a country with a soft national currency, where foreign currency performs a different set of functions than in the case of a developed country. It has been revealed that the main suppliers of foreign currency to the market of a country with a soft currency are exporters, and not international investors or traders focusing on interest rates. Exporters usually do not sell all foreign currency earnings, but only that part of it that is needed to meet production needs. Consequently, in the event of a sharp increase in the exchange rate of foreign currency, the volume of its sales will decrease in proportion to the increase in the rate. Therefore, according to the author’s concept, the configuration of the currency supply curve has two segments with opposite bends. It has been established that an increase in export currency earnings to a developing country leads to an increase in domestic income. A significant part of this additional income is usually spent on the purchase of imported goods and services, which causes an increase in the demand for foreign currency. Consequently, the demand and supply of currency are in a dynamic relationship, so the exchange rate can remain at approximately the same level, despite the constant increase in foreign exchange earnings from exports. With a proportional increase in the monetary base through targeting the exchange rate, this will ensure sustainable economic growth and increased well-being of the population. The practical value of the article lies in the need formulated by the author to take into account, when planning an exchange rate policy strategy in a country with a soft currency, the non-standard nature of the demand curve, as well as the specific dynamic interaction of supply and demand.