Finance, Forex and Investments

What factors causes the currency flactuation?

This question hit my mind recently when I saw a significant appreciation of Indian Rupee against US Dollar. And also please explain on what basis a value of any country's currency decided?

Public Comments

1. Am not too sure but I think there are two ways of determining a country's currency value. First, the government or some banking regulator fixes the rate; I think this's something we used to follow here in India until 1991 - the year of the beginning of liberalisation. The other way is much like market trading, wherein several factors influence the value of currency, with one major factor being the foreign exchange inflows - the foreign direct investment. Maybe even the country's economic rating also has a say. In the second method, the regulator - the RBI here in India - does intervene as and when required to determine the value of the rupee.
2. In the absence of government intervention, the main driver of currency fluctuations is the demand for the currency relative to the demand for other currencies. If many people want to trade dollars for Indian rupees, the value of the rupee will rise and the dollar will fall. This happens when there is a greater demand for one country's products, denominated in it's home currency, relative to the demand for another country's products. India, I believe, runs a large trade surplus with the rest oft he world, while the U.S., on the other hand, runs a large trade deficit. There are several factors that can influence this dynamic. A country's central bank can reduce the money supply by issuing bonds and collecting currency for them. They can increase the required reserve level that banks must hold, therefore reducing the amount they can lend. On the other hand, the central bank can buy back bonds, injecting more money into the market, or they can simply start printing more money and buy things, thus getting it into circulation. This last tactic usually leads to runaway inflation, since the government often winds up issuing more money to keep ahead of individuals' perception of its value. Other governments can also affect the value of a country's currrency, which has happened in the case of the U.S. Since the U.S. dollar is the world's de facto reserve currency (the one that most international transactions are done in), it is in the interest of many countries to keep large stocks of U.S, currency on hand, and to keep the value of the dollar stable. This allows the U.S. to float more of its debt on world markets without suffering the ill effects of devaluing its currency. I hope this helps.
3. The value of a local currency is its value in real terms. i.e., its purchasing power in the international market. For example what you can buy by, say Rs. 100.If you can buy items worth US $2 then the value of Rupee is 1/50 American Dollar. Similar is the case with other currencies. The reserve bank of India should hold assets and foreign currency in reserve to back the value of rupee. When FII s pump in more US $ and also we earn foreign exchange in large volume then more US $ is available for rupee and hence the value of rupee goes up. The vice versa ia also possible. That is how the dollar- rupee value is maintained.
4. i think the Currency fluctuations are caused by changes in the market price of any currency. Factors which lead to currency fluctuations include: Changes in a country’s interest rate – or rumours of a change; Perceived strength of a country’s economy; Unemployment levels; Perceived social and political stability – or lack thereof; Increased market demand for a specific currency; Reduced market demand for a specific currency.
5. Currency fluctuations: A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency). Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions. The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit). In choosing what type of asset to hold, people are also concerned that the asset will retain its value in the future. Most people will not be interested in a currency if they think it will devalue. A currency will tend to lose value, relative to other currencies, if the country's level of inflation is relatively higher, if the country's level of output is expected to decline, or if a country is troubled by political uncertainty. For example, when Russian President Vladimir Putin dismissed his Government on February 24, 2004, the price of the ruble dropped. When China announced plans for its first manned space mission, synthetic futures on Chinese yuan jumped (since China's currency is officially pegged, synthetic markets have emerged that can behave as if the yuan were floating). Basis Of currency rate decision: If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world. A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency. For example, between 1994 and 2005, the Chinese yuan renminbi (CNY, ¥) was pegged to the United States dollar at ¥8.2768 to $1.
6. Supply & Demand. Supply: If countries are inflating their currency, there will be more available on international markets and it will not be as valuable. This will additionally cause lower interest rates in the domestic market. Demand: If investment opportunities are poor in the domestic economy, currency will not be as valuable internationally.
7. currency fluctuation or rather the value of a currency is determined by various factors depending upon what time frame , we are looking at. Short term values are determined by immediate supply and demand you may find during pre election time the rupee will appreciate because lot of funds from abroad will get converted to Indian currency .In the medium term it is the country's export /import and capital flows that will determine the value. In the long term it is the confidence of people in the country's policies , the stability of the system of government , Its credibility etc which determines the value of a currency . Dollar enjoyed the reserve currency status because of this factor.
8. Lactose intolerance
9. Most currency traders do heavy drugs and are paranoid. The very least that they do is 36 cups of coffee in a 4 hour work day. Therefore if they have been watching the Wizard of Oz the night before and there is a slight wind the next morning, they begin to think about a hurricane bring snow to the orange juice trees of Florida and therefore the Florida economy being ruined. On top of this they have marvellous senses of humour and some of them plant tape recorders next to their friend traders that say Sell or Buy on a loop recording. One trader I personally knew expelled noxious fumes from his body when he bought currency. this worked its way through the Reuters system and the traders on the other side thought that there had been an international disaster and started to sell currency.