The
rate of exchange between different currencies will vary, almost every
day. The following reasons enable to describe the fluctuation. The
possible causes for fluctuation of
exchange rate are changes in the demand for and the supply of a
currency on the foreign exchange market. All the following factors that
cause a change in demand or supply and cause either a shortage or a surplus,
which in turn cause fluctuation of exchange rates. The factors
are 1) Changes in the balance of trade in goods and services 2)
Inflation 3) Changes in interest rates 4) The price of oil 5)
Speculation
1)
Changes in the balance of trade in
goods and services are the most important factor for exchange rate
fluctuation. When imports are greater than exports causes a current
account deficit, which causes less demand for the currency by
foreigners. Less demand causes a fall in price of the currency. The
effect will be just opposite if there is a current account
surplus.
2) If the rate of inflation is very high than that of other countries, the
price of goods will rise faster than foreign prices. This will cause a fall in
demand for goods in foreign countries. This will cause a reduction in export
and hence a fall in the value of currency.
3)
If the rate of interest in a
country is very high, the foreigners are interested to save money in that
country’s banks and financial institutions. This will increase the demand for
that country’s currency and hence a rise in the value of their
currency.
4)
Oil is considered as a major source of energy. Demand for energy made out
of oil cause changes in the price of currency. Therefore price of oil is
considered as another important aspect.
5)
Speculation is the process
of buying and selling with a view to make profit from a change in price.
Currencies are also bought and sold in the market as a commodity.
Therefore expecting a change in price, speculators trade in currency.
This will also cause fluctuation of exchange rate.
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