Economics Exchange Rate Systems Questions
Speculation can impact exchange rates by influencing the demand and supply of currencies in the foreign exchange market. When speculators anticipate that a currency will appreciate in value, they increase their demand for that currency, causing its value to rise. Conversely, if speculators expect a currency to depreciate, they may sell it, leading to a decrease in its value. Speculation can create volatility in exchange rates, as it is driven by expectations and market sentiment rather than fundamental economic factors.