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.

[There are many reasons that exchange ranges fluctuate, including both fundamental and technical reasons. Investopedia's Technical Analysis Course will show you how to capitalize on technical movements by effectively reading charts and using technical indicators. With over five hours of on-demand video, exercises, and interactive content, you'll learn both basic and advanced techniques to capitalize on opportunities and manage risk.]

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 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 >>
  2. How do you make money trading money?

    How someone makes money in forex is a speculative risk: you are betting that the value of one currency will increase relative ... Read Answer >>
  3. How do changes in national interest rates affect a currency's value and exchange ...

    Generally, higher interest rates increase the value of a given country's currency, but Interest rates alone do not determine ... 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

    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.
  3. Trading

    Currency Exchange: Floating Rate Vs. Fixed Rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  4. Trading

    How Are International Exchange Rates Set?

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

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  6. Trading

    What Forex Traders Need To Know About The Yen

    The Japanese Yen possesses some unique qualities that traders should know before jumping in.
  7. Investing

    From Mrs. Watanabe To Abenomics: The Yen's Wild Ride

    Relatively recent upstarts like the euro and the yuan may hog the currency headlines these days, but for sheer drama and gut-wrenching volatility, no currency can match the venerable Japanese ...
  8. Investing

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  9. Trading

    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.
RELATED TERMS
  1. Currency

    Currency is a generally accepted form of money, including coins ...
  2. Currency Appreciation

    An increase in the value of one currency in terms of another. ...
  3. Weak Currency

    A currency with value that has depreciated significantly over ...
  4. Soft Currency

    A soft currency is one that's value is inherently weak and not ...
  5. Constant Currencies

    An exchange rate that eliminates the effects of exchange rate ...
  6. Currency Band

    A currency system that establishes a trading range that a currency's ...
Hot Definitions
  1. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  4. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  5. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
Trading Center