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.)

  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. How does inflation affect the exchange rate between two nations?

    Understand how inflation can affect foreign exchange rates of a currency and how it is just one of many economic factors ... Read Answer >>
Related Articles
  1. Trading

    Top 5 Hardest-Hit Currencies

    The value of a country's currency is dependent on many factors that will cause it to fluctuate, relative to other world currencies.
  2. Trading

    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. Trading

    How Does The Yen Affect American Finance?

    Although it has fallen to number four on the trading partner list, Japan and its currency have a large impact on the American economy.
  4. Trading

    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. Trading

    How Are International Exchange Rates Set?

    International exchange rates show how much one unit of a currency can be exchanged for another currency.
  6. Trading

    Understanding the Floating Exchange Rate

    Floating exchange rate is the exchange rate between two currencies at any given time.
  7. Trading

    What Happens in a Currency Crisis?

    A currency crisis comes from a decline in the value of a country’s currency.
  8. Trading

    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.
  9. Investing

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  1. Funding Currency

    The currency being exchanged in a currency carry trade. A funding ...
  2. Currency

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

    The rate at which two currencies in the market can be exchanged. ...
  4. Dollar Rate

    The exchange rate of a currency against the U.S. dollar (USD). ...
  5. USD/JPY (U.S. Dollar/Japanese Yen)

    The abbreviation for the U.S. dollar and Japanese yen (USD/JPY) ...
  6. Currency Appreciation

    An increase in the value of one currency in terms of another. ...
Hot Definitions
  1. Subprime Auto Loan

    A type of auto loan approved for people with substandard credit scores or limited credit histories. There is no official ...
  2. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  3. Federal Debt

    The total amount of money that the United States federal government owes to creditors. The government's creditors include ...
  4. Passive Management

    A style of management associated with mutual and exchange-traded funds (ETF) where a fund's portfolio mirrors a market index. ...
  5. Series 7

    A general securities registered representative license administered by the Financial Industry Regulatory Authority (FINRA) ...
  6. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
Trading Center