Why Does Currency Fluctuate?


Quick Answer

Currency values fluctuate depending on factors such as a country's monetary policy and prevailing economic conditions. A country's high inflation rate lowers the value of its currency. In such cases, the country's central bank raises interest rates in order to attract foreign investors and raise the value of its currency.

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Full Answer

A country's balance of trade with its trading partners also determines the value of its currency. Political and economic uncertainties in a country typically lower the value of its currency. The value of a country's currency declines if the foreign investments are withdrawn, which creates economic instability.

A country's negative economic conditions, such as significant unemployment, also lower the value of its currency. In a consumption economy, such as the United States, high unemployment rates reduce the value of the U.S. dollar; this makes U.S. exports cheap, but it may create more employment opportunities. An increase in the value of a country's exports raises the value of its currency and vice versa.

Investors view a country that has a large public debt as too risky and do not invest in such a country, which contributes to a decline in the value of its currency. Investors who want to invest in foreign countries should consult trusted experts on how to minimize the risks associated with currency fluctuations.

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