The demand for foreign currency in the current account is determined by the factors that drive the demand for real goods and services. The demand for real imports is influenced principally by the domestic price of any foreign good or service, the presence of any tariffs or subsidies, the price of domestic substitutes and/or complements, the level of domestic income, and tastes and preferences. The domestic price of the foreign good or service is of course the product of the price expressed in foreign current times the appropriate exchange rate. Since the demand for foreign currency by the home country is simply the supply of home currency to the foreign country, if one knows the demand for foreign exchange in each of two countries, the supply of foreign exchange to each country is also known.
