Why Do Currencies Fluctuate?
The Foreign Exchange (Forex) is in operation 24 hours a day, 7 days a week. People are trading in Forex all of the time. The Foreign Exchange is the largest trading market in the world. Trillions of dollars in currency are literally traded every single day on the Foreign Exchange. Each day, as currencies are traded; bought and sold, you will see the rates of currencies continually rising and falling. Currencies from around the world are in a constant state of fluctuation.

How Do Currencies Fluctuate?
Although if you were to go back in the history of currencies, you would find that previously the value of a currency was based on the amount of gold that the country held. The USA and other developed countries made a decision to change this system and to base the value of currency on the gross domestic product of each individual country. This is the system that we still find in use today.

When it comes down to the complex task of deciding the rate for each currencies, demand for that currency is the major deciding factor. Currencies are subject to two types of demand, Transactional Demand and Speculative Demand. Transactional Demand is calculated by the country’s economic growth, the employment rate in the country as well as how quickly money moves through that country’s economy. Speculative Demand is calculated by forecasts related to whether the currency is expected keep the value that It is at. This is assessed by projected, future economic activity, any inflation that might be anticipated and more.

The Foreign Exchange market trades continually and operates non-stop. It is a worldwide market and therefore an hour that might be nighttime in your home country could be the middle of the day somewhere else. Activity is happening all of the time in the world of Forex and rates are rising and falling continually.

Currencies Affect One Another
Currencies all relate to one another at the end of the day. They are compared against one another and they are bought and sold against one another, in what is known as currency pairs, and they are constantly measured against one another. Currency rates are affected by a whole host of factors.

One significant factor that has not yet been mentioned yet that has a large impact on currency rates is interest rates. Every country has their version of a central bank. It is the central bank in each country that sets the interest rates for lending and borrowing. These interest rates also affect the rate at which their currency sells for. It is measured against other currencies using rather complex formulas. Determining currency rates is not an exact science because speculation is involved. Therefore there is risk involved in this process. Carry traders, which can almost be described as middle men, bear the brunt of this risk. There is a chance that they will lose money because of this. At the same time, there is a chance that they will speculate correctly and earn extremely large sums of money because of it.