Why Do Currency Rates Fluctuate
Money is the central factor in this world. As the money market fluctuates, so do our lives. Market is run by invisible hands. It’s something which is beyond our control but it regulates our lives.
One of the most important factors in money is currency fluctuation. It’s more significant to people who make remittances. Expats living abroad have to send money to their families back home.
So here is our guide, that will help you successfully understand the science around currency exchange.
What is the Currency Rate?
Just for the sake of understanding, imagine that you want to trade something with a friend. You both agreed on trade who will give what and in what amount/quality. Currency rate is similar, but it’s about transfer money from one currency to another currency.
The currency rate tells us the value of one country’s money compared to another’s. For example, if the currency rate between the US dollar and Japanese yen is 100, then $1 can get you 100 yen.
Sites like OANDA, XE, and X-Rates provide these currency rates. They calculate how much one type of money is worth in another.
Knowing the currency rate is useful, especially when traveling or shopping online from foreign stores. It helps you understand your spending in terms of your currency.
One thing that might be worth noticing is that currency rates change often due to global economic shifts. So, it’s good to check the latest rates before any transaction involving foreign currencies.
Why Do Currency Rates Fluctuate
Currency rates change a lot. Some go up, some go down. Why does this happen? It’s all about supply and demand.
Supply and Demand
Supply/demand is the basic principle of the market. Supply simply denotes how much in number or quantity is something. On the other hand, demand is how many people want it. You can ask for a high price because the demand is high. But if you have something no one wants, you might have to lower your cost to make it more attractive. This is how supply and demand work.
Currencies work the same way. If more countries and people want a specific type of currency, its price goes up. If there are fewer people who want it, the price goes down.
Why Demand Changes
There are different factors which influence the demand of currency. One is monetary policy. This is how a country controls its money. Countries might make more money or less. They also can change interest rates. This can make people want more or less of that money.
The inflation rate is another thing. Inflation is when prices of things go up. A little inflation is good. But more is needed to make the money worth less.
Another important thing is the condition and stability of a currency. If a government is stable and everything is on track, investors from foreign countries might want to invest more in that country. This makes its price go up.
Investors keep in mind such things before investing in a country. They look at how much a country makes, and what’s the condition of its economy. Also other factors like the housing market in the country and trading patterns of the country. If these things are doing well, it means people will be more interested to buy its currency
Politics and Money
Political situation of a country also affects the currency status. Unstable and anti-democratic countries will not get not much trade and investments. If a country has problems or is in a global conflict, people might not want its money. This can make the price go down.
UAE Dirham
One example of a stable currency is the UAE dirham. Since 1997, it has been linked to the US dollar. The rate is 1 US dollar to 3.6725 AED. Investors see it as a safe currency.
So, many things can make currency rates go up or down. It’s all about how much people want the money and how much is available.
Factors Influencing Currency Rate
It’s a complex thing. But we will simplify it for you. You need to just understand a few factors to understand what makes the currency rate fluctuate.
Inflation
When prices of things in a country go up slowly, it’s called inflation. If a country has low inflation, its money can be worth more. It means the buying power of money is more. Like it’s one unit is worth more things. But when there is inflation, people need more units to buy the same thing. It means the power of that one money unit decreased.
Interest Rates
These are like the cost of borrowing money. If interest rates are high, people want that country’s money because they get more when they invest. This can make the currency worth more.
Trade
If a country buys more from other countries than it sells to them, it is called a trade deficit. This can make the country’s money worth less.
Public Debt
This is how much the government owes. If a country has a lot of debt, it might make too much money to pay it back. This can cause high inflation and make the money worth less.
Debt Rating
This is like a school grade for a country’s debt. If the grade is good, people want to lend the country money. If the grade is good, people want to avoid lending the country money. This can affect the worth of the country’s money.
Economic Performance
This is how well a country’s economy is doing. If a country is making more goods and services, its money can be worth more. If the country is sending things abroad, it’s earning more and its money is worth more.
Trade Balances
This is about buying and selling things with other countries. If a country buys more than it sells, its money could be worth less. It means more taxes on people. Because they will have to pay import tax on the thing they are buying. This way the buying power of money is reduced.
Stability of a Country
This is about how safe a country is. If a country is safe and stable, people might want more of its money. This can make money more powerful. If the country has frequent incidents of terrorism, street crimes etc people might not want to invest their money in these countries.
Market Expectations
This is what people assume will happen in the future. If a country seems to do well in the future, people would like to invest more money in that country. This can make the money worth more. The prediction depends on a lot of things. It includes how good the currency is doing, what the trading situation is and the overall peace position of that country in the international community.
FAQs
Are Currency Exchange Rates Constantly Fluctuating?
Yes, currency exchange rates fluctuate constantly. Market is governed by invisible hands. So you can never know when the prices are going to stay the same and when they are going to move.
Do Currency Exchange Rates Change Daily?
Yes currency exchange rates change at least one time in a business day. It runs across the clock.
What Will Happen If Exchange Rates Fluctuate?
If the currency exchange rate is positive, exports will be more expensive and imports will be cheaper. That way a country’s
Which Country Currency Fluctuates the Most?
GBP/NZD, GBP/AUD, GBP/CAD, are the currencies which fluctuate more than any other curruncies.
How the Currency Value of Each Country Decided?
There is a simple rule and that is it is determined by supply and demand. If there is an increase in the demand, the value will increase. If there is decrease in demand and abundance in supply, value will decrease.
Does Exchange Rate Change on Weekends?
No, it doesn’t change over the weekend. Because currency markets are closed over the weekend.
