Factors that Cause Fluctuation in FX Currency Exchange Rate 

The country’s currency depends on different factors, such as its natural resources, technological development, import and export, the standard of living of its people, poverty rate, etc. 

Due to changes in these factors, the currency’s value also changes. The stronger the country’s economy, the stronger the currency; the weaker the country’s economy, the weaker the currency value. Have a look at these major factor that causes exchange rate fluctuations. 

Political state: The currency’s value is highly affected by the political state in the country. Government rules and regulations, political turmoil, and diplomatic relations cause exchange rate fluctuation. 

Good diplomatic relations, flexible regulations, and political stability cause a positive change in the currency and vice versa. 

For example, suppose the residents of China are protesting against its current government. Now it has a negative effect on its currency.

Debt ratio: Countries usually take loans from international organizations and other developed countries to develop their infrastructure and several other reasons. Generally, the debt of developing and underdeveloped countries is more than others. 

A country’s income needs to be more than the debt to maintain its currency’s value. Otherwise, it results in inflation, and the currency value depreciates. 

You may have heard the news about the situation of Bankcorruptcy in a country. It happens when there is an economic collapse in the country. Traders will not invest in a country dealing with the economic crisis.

Supply and Demand: The concept of forex currency exchange rate fluctuation based on demand and supply like comex market is simple. When the demand is more, supply is less, and currency value appreciates; when the demand is less, supply is more, and currency value decreases.

The demand for its currency will be more than in other countries where thousands of travelers, students and business personalities visit daily. 

Not only this, but the production power also affects currency value. 

For Example, China is one of the biggest economies in the world. The reason is simple; it exports thousands of products daily and globally.

High Inflation: At present, major economies are dealing with high inflation. It is a state where a country’s buying power or purchasing power decreases with respect to other countries. 

For example, for buying a bread loaf, you are paying 10$, which before a month was available for 4$. There is a huge difference between prices that also in very less duration. 

If the price of the loaf increases in point, then it might be a case of an increase in the worth of the loaf. But in this case, there is a difference of 6$ in the price, which means that your currency depreciates against the good. 

It is a clear case of inflation. That’s how the FX Currency Exchange rate fluctuates. Countries with higher inflation have weaker currencies, and countries with lower inflation have stronger currencies. 

Market Movements: Traders indulge in Foreign currency trading, buying and selling currencies pair based on their prediction to make money. When speculators buy any currency in large numbers, it appreciates its value and vice versa. 

The USD/EUR currency pair is the most traded. As a result, these two are the strongest currency in the world. Traders, daily, invest in this currency pair.