Why Forex Rates Fluctuate
Currency Rate Changes
The currency rates in the foreign exchange market change daily, and can often change several times during the day. There are several reasons for the fluctuations, but professional and private forex traders make their profits by basing their trades around changes in currency valuations. Since the forex market is a 24-hour global market, currency rates are subject to frequent changes, according to the economic, political, and social conditions in each country that participates in the market.
Market Conditions
Conditions within the forex market are one factor that may affect currency rates. If one country’s currency rises or declines sharply during trading, this can influence the relative value of other currencies. As an example, if the Japanese Yen grows in value overnight due to the strength of the Asian markets, the value of Western currencies such as the United States Dollar (USD) and the British Pound (GBP) may decline simultaneously. Conversely, if the British Pound’s value rises suddenly, this may cause the value of other currencies to decrease.
Economic Indicators
A nation’s economic outlook also has a strong impact on the value of its currency. The country’s gross domestic product, the national unemployment rate, the amount of debt a country owes to other nations and the projected future for the economy all influence the worth of the national currency.
National Stability
Countries that are experiencing strong political or social upheavals generally have weak currency values during these times of change. Areas of the world where the government or the financial industry is in turmoil may be considered high-risk environments in which forex traders may not want to invest. When these events happen, traders who are holding currencies in these countries may sell their shares quickly, causing the value of the currency to go down.