Question: Why Do Exchange Rates Fluctuate?

Most of the world’s currencies are bought and sold based on flexible exchange rates, meaning their prices fluctuate based on the supply and demand in the foreign exchange market.

A high demand for a currency or a shortage in its supply will cause an increase in price.

Why do exchange rates change?

Terms of Trade

A country’s terms of trade improves if its exports prices rise at a greater rate than its imports prices. This results in higher revenue, which causes a higher demand for the country’s currency and an increase in its currency’s value. This results in an appreciation of exchange rate.

Why does the exchange rate go up and down?

If inflation (the rate at which prices are rising) gets too high, because demand for goods exceeds supply, it can cause economic instability and a fall in the value of the currency. This means that demand drops and inflation slows down. We’ve seen how low interest rates generally make for low exchange rates.

How often do exchange rates change?

No, exchange rates do not change daily, in the sense that the exchange rate does not change just once a day. For example, the pound will not change value just once versus the euro or US dollar, from Monday to Tuesday. Instead, exchange rates change much more frequently. In fact, they change every second.

Why does the Canadian dollar fluctuate?

It fluctuates because it is a ‘free-floating’ currency. The value of the Canadian dollar is wholly determined by the economics of supply and demand in the global currency markets. Hence, it is inevitable that it would fluctuate from time to time.