I have got some confusion in trying to explain why a trade surplus is going to lead to an increase in the exchange rate. The usual logic goes as follows.
- Export X > Import M
- Demand for the country's currency increase
- Appreciation happens
What confuses me is step 2. Why the demand for the country's currency increase? I know that there is certainly a high demand for the country's currency because money is needed to buy its exports, but the demand is high does NOT mean the demand is INCREASING. Why can't the demand for the currency just stay high, but constant, so foreigners can get their needed money to buy exports?