Why does the demand for foreign currency fall and supply rises when its price rises? Explain.

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Solution

When price of foreign exchange rises, import becomes costlier, demand for imports will fall. As a result demand for foreign currency falls.
When price of foreign exchange rises, domestic goods become cheaper for foreign buyers, because they can now buy more from one unit of foreign currency. As a result demand for exports rise, leading to increase in supply of foreign exchange.
Thus, it can be concluded, that the demand for foreign currency and its price has an inverse relationship, while, supply has a direct relationship with the price of foreign exchange.

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