Why Do Currencies Fall and Rise?
Most
of the world’s currencies are bought and sold based on flexible exchange
rates, meaning their price 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.
For
Example-
The
reason that some of the popular world wide accepted currencies like Dollar,
goes up. Because most of the countries need dollar while trading in International
market. Moreover Dollar is one among the most accepted currency. The result is
very predictable here that the dollar prices often go up.
Therefore,
it can be said that Shortage is directly linked to the rise in the price.
A currency’s supply and demand are tied to several
intertwined (twined or twined together) factors including the country’s
monetary policy, the rate of inflation, and political and economic conditions.
To
Control the Uncertainty -- Monetary policy – It
is how the Central Bank of governments manages liquidity to create
economic growth. In Indian Scenario the Central Bank is the reserve Bank of
India.
Liquidity
is how much 'ease' in the money supply exits that means the cash
flow.
That includes credit, cash, checks, and money market mutual funds.
The most important of these is credit. It includes loans, bonds,
and mortgages. These are also used as a tool in Monetary Policy to curb Inflation-
Increase in Price OR Deflation - Decrease in Price.
Objective of monetary policy— The primary
objective of central banks is to manage inflation. The second is to reduce
unemployment, but only after they have controlled inflation.
The money supply is the amount of a currency in circulation. As a
country’s money supply increases and the currency becomes more available, the
price of borrowing the currency goes down.
Interest rate – Interest
rate is the price at which money can be borrowed. With a low interest
rate, people and businesses are more willing and able to borrow money. As they spend
this borrowed money, the economy grows. However, if there is too much money in
the economy and the supply of goods and services does not increase accordingly
price may begin to inflate or rise.
What is the rate
of Inflation?-- Another
variable that heavily influences the value of a currency is the inflation rate.
The inflation rate is the rate at which the general price of goods and
services are increasing. While a small amount of inflation indicates a
healthy economy, too much of an increase can cause economic instability, which
nay ultimately lead to the currency’s depreciation.
Political and Economic Conditions
Due to Rise and fall in Currencies
The economic and political conditions of a country can also cause
currency’s value to fluctuate. While investors enjoy high interest rates, they
also value the predictability of an investment. Therefore, currencies from
politically stable and economically sound countries generally have higher
demand, which, in turn, leads to higher exchange rates. The other factor is if
a country is during political unrest or global tensions, the currency becomes
less attractive and demands falls.
Conclusion
There’s is no single indicator that explains exactly why a
currency has fluctuated or predicts with certainty what will be the price of it.
Instead, many factors related to demand and supply affect currency values. More
knowledge and understanding of market conditions and their implications for
currency fluctuations leads more accurate predictions. However, the extreme
rise and fall in the economy may leads to less investment. So The Central Banks
acts as the shock absorber, and it tries to balance the economy.
