Demand for foreign currency, comes from the people who need it to make payment in foreign currency.
Supply of foreign currency comes from the people who receive it due to following reasons:
(a) Exports of goods and services
(b) Foreign Investment
(c) Speculations
Reasons for rise in supply :
(i) When the price of a foreign currency rises, domestic goods become relatively cheaper. It induces the foreign country to increase their imports from the domestic country. As a result, supply of foreign currency rises. For e.g., if price of U.Sdollar rises from ₹45 to ₹50 , then exports to USA will increase as Indian goods will become cheaper. It will raise the supply of U.S. dollars.
(ii) When price of a foreign currency rises, supply of foreign currency rises as people want to make gains from speculative activities.