What kinds of events can cause

fluctuations in currency values?

Universitatea Ovidius Constanța

Facultatea de Științe Economice
Specializarea Finanțe-Bănci
Disciplina: Limba Engleza
Student: Ciciu Paris
Grupa 1
These days, some currency rates are jumping to all-time highs while
others plunge to record lows. Exchange rates are constantly fluctuating,
but what, exactly, causes a currency's value to rise and fall? Simply put,
currencies fluctuate based on supply and demand.

Most of the world's currencies are bought and sold based on flexible
exchange rates, meaning their prices fluctuate based on the supply and
demand in the foreign exchange market. A high demand for a currency
or a shortage in its supply will cause an increase in price. A currency's
supply and demand are tied to a number of intertwined factors
including the country's monetary policy, the rate of inflation, and
political and economic conditions.

Monetary Policy
One way a country may stimulate its economy is through its monetary
policy. Many central banks attempt to control the demand for currency
by increasing or decreasing the money supply and/or benchmark
interest rates.

The money supply is the amount of a currency in circulation. As a

country's money supply increases and the currency becomes more
available, the price of borrowing the currency goes down. The interest
rate is the price at which money can be borrowed. With a low interest
rate, people and businesses are more willing and able to borrow
money. As they continually spend this borrowed money, the economy
grows. However, if there is too much money in the economy and the
supply of goods and services does not increase accordingly, prices may
begin to inflate.
Rate of Inflation
Another variable that heavily influences the value of a currency is the
inflation rate. The inflation rate is the rate at which the general price of
goods and services are increasing. While a small amount of inflation
indicates a healthy economy, too much of an increase can cause
economic instability, which may ultimately lead to the currency's
depreciation.

A country's inflation rate and interest rates heavily influence its

economy. If the inflation rate gets too high, the central bank may
counteract the problem by raising the interest rate. This encourages
people to stop spending and instead save their money. It also stimulates
foreign investment and increases the amount of capital entering the
marketplace, which leads to an increased demand for currency.
Therefore, an increase in a country's interest rate leads to an
appreciation of its currency. Similarly, a decrease in an interest rate
causes depreciation of the currency.

Political and Economic Conditions

The economic and political conditions of a country can also cause a
currency's value to fluctuate. While investors enjoy high interest rates,
they also value the predictability of an investment. This is why
currencies from politically stable and economically sound countries
generally have higher demand, which, in turn, leads to higher exchange
rates.

Markets continually monitor the current and expected future economic

conditions of countries. In addition to money supply changes, interest
rates, and inflation rates, other key economic indicators include gross
domestic product, unemployment rate, housing starts, and trade
balance (a country's total exports less its total imports). If these
indicators show a strong and growing economy, its currency will tend to
appreciate as demand increases.

Similarly, strong political conditions impact currency values positively. If

a country is in the midst of political unrest or global tensions, the
currency becomes less attractive and demand falls. On the other hand,
if a market sees the introduction of a new government that suggests
stability or strong future economic growth, a currency may appreciate
as people buy it based on the good news.

Conclusion
There is no single indicator that explains exactly why a currency has
fluctuated or predicts with certainty what its price will do. Instead,
many factors related to demand and supply affect currency values.
What has been shown is that more knowledge and understanding of
market conditions and their implications for currency fluctuations leads
to more accurate predictions.