Supply refers to the amount of an asset available, while demand is the amount of an asset that people are willing to buy.
As the supply of an asset increases, its value decreases. Conversely, when the supply of an asset decreases, its value increases. As demand for an asset increases, its value increases. Conversely, as demand for an asset decreases, its value decreases.
Because this principle applies to currency markets, many traders look at the supply and demand of a particular currency at a given point in time to determine whether that currency will rise or fall in value.
One way to measure supply and demand is to imagine a seesaw with all the fundamental factors that affect that currency. For example, when economic reports increase the demand for dollars or decrease the supply of dollars, place that fundamental factor on the left side of the seesaw. This fundamental factor is placed on the right side of the seesaw when economic events reduce the demand for dollars or increase the supply of dollars. If there are more factors on the left, then the seesaw will tilt upward and the dollar will rise. On the other hand, if there are more factors on the right, then the seesaw will tilt downward and the dollar will depreciate.
This way, traders are able to note all the near-term fundamental factors affecting a specific currency. This helps assess whether the currency is performing relatively well.
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