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The demand for euros on the foreign exchange market is a derived demand. Explain this statement.

The demand for euros on the foreign exchange market is a derived demand. Explain this statement.

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Answer #1

It is right and we need to consider the reasons why those who demand Euros in the forex market do so. There could be two types of demanders: Those who live outside the Eurozone and import goods and services produced in the Eurozone to their countries. Since they need to pay for these in Euros, they would buy Euros from the market in exchange of their home country currency.

Similarly, those who want to buy assets in Eurozone (or invest there) would need Euros which they would buy in the forex market by exchanging their home country currency

Hence the demand for Euros in the foreign exchange market is a derived demand (derived from the underlying transaction to buy goods / services or to invest).

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