A:

Exchange rates float freely against one another, which means they are in constant fluctuation. Currency valuations are determined by the flows of currency in and out of a country. A high demand for a particular currency usually means that the value of that currency will increase. Demand for a currency is created by tourism, international trade, mergers and acquisitions, speculation, and the perception of safety in terms of geo-political risk. If, for example, a company in Japan sells products to a company in the United States and the U.S.-based company would have to convert dollars into Japanese yen to pay for the goods, the flow of dollars into yen would indicate a demand for Japanese yen. If the total of currency flow led to a net demand for the Japanese yen, then the yen would increase in value.

Currencies are traded around the clock - 24 hours per day. Even though morning in Tokyo occurs during U.S. nighttime, trade and banking continue around the world. Therefore, as banks around the world buy and sell currencies, the value of currencies remain in fluctuation. Interest rate adjustments in different countries have the biggest effect on the value of currencies because investors typically look for safe investments with the highest yields. If an investor can earn 8.5% interest on deposits in England, but can pay 1% interest for the use of money in Japan, then the investor would pay to borrow the Japanese yen in order to buy the British pound. Such trades take place all the time and in very large numbers.

(For more on this topic, see Get To Know The Central Banks and Forces Behind Exchange Rates.)

RELATED FAQS
  1. What is foreign exchange?

    Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a free economy, a country's ... Read Answer >>
  2. How are international exchange rates set?

    International currency exchange rates display how much one unit of a currency can be exchanged for another currency. Currency ... Read Answer >>
  3. What types of companies benefit from reporting results utilizing constant currencies ...

    Understand constant currency figures, and explore some of the reasons why a company is likely to benefit from reporting using ... Read Answer >>
  4. Why do forex traders use a currency converter?

    All currencies are quoted in pairs - one country's currency against another country's currency. A currency converter is used ... Read Answer >>
  5. How do changes in national interest rates affect a currency's value and exchange ...

    Understand the role that changes in interest rates can play in determining the value and foreign exchange rate of a country's ... Read Answer >>
  6. Can I trade a currency when its main market is closed?

    In the forex market, currencies from all over the world can be traded at all times of the day. The forex market is very liquid, ... Read Answer >>
Related Articles
  1. Forex Education

    Forex Currencies: Conclusion

    By Brian Perry Conclusion The currency markets are the largest and most actively traded financial markets in the world with daily trading volume of more than $3 trillion (Triennial Central ...
  2. Forex Fundamentals

    The Effects Of Currency Fluctuations On The Economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by ...
  3. Forex Education

    How Are International Exchange Rates Set?

    International exchange rates show how much one unit of a currency can be exchanged for another currency.
  4. Forex Education

    Interest Rate and Currency Value And Exchange Rate

    In general, higher interest rates in one country tend to increase the value of its currency.
  5. Forex Education

    The 6 Most-Traded Currencies And Why They're So Popular

    Every currency has specific features that affect its underlying value and price movements in the forex market.
  6. Markets

    What Happens in a Currency Crisis?

    A currency crisis comes from a decline in the value of a country’s currency.
  7. Economics

    Macroeconomics: Currency

    By Stephen Simpson For citizens of different countries to conduct trade, they have to buy and sell each other's currencies. The price of a nation's currency, expressed as an amount of a second ...
  8. Forex Education

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some beginner trading strategies to get started.
  9. Forex Education

    4 Of The Most Popular Traded Currencies

    Every day, trillions of dollars trade in the forex market. Here are a few of the most popular currencies, and some characteristics for each.
  10. Forex Education

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
RELATED TERMS
  1. Currency

    Currency is a generally accepted form of money, including coins ...
  2. International Currency Exchange Rate

    The rate at which two currencies in the market can be exchanged. ...
  3. USD/JPY (U.S. Dollar/Japanese Yen)

    The abbreviation for the U.S. dollar and Japanese yen (USD/JPY) ...
  4. Dollar Rate

    The exchange rate of a currency against the U.S. dollar (USD). ...
  5. Adjustment

    The use of mechanisms by a central bank to influence a home currency's ...
  6. Soft Currency

    A currency with a value that fluctuates as a result of the country's ...
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center