Media Blog
The Fluctuation of Foreign Currency
Taking a trip outside your country will certainly involve some changing of currency. Consequently, it may be a wonder why the various monetary values involved in transactions aren’t always the same. The per-unit value’s differences are often marginal, but with a substantial sum exchanged, the differential amount can also be significant. If you are lucky enough, the value of the foreign currency, say the euro, left over from a trip will have a better exchange rate when it is changed back to your home currency. You may even think that a considerable gain would have been made had a bigger amount of foreign currency was saved from that trip and eventually exchanged.
This perchance occurrence illustrates one of the mechanisms by which money traders can gain profits. What could be at play is simply the law of supply and demand wherein more people are in the market to buy euros while less is available in the currency exchange international trading. In certain cases, an artificial shortage of a currency is created by speculators to jack up the exchange rate. Monetary authorities, however, are always on the lookout for such market maneuverings and have installed measures to minimize such instances from happening.
Some governments, like the United States, directly intervene in the market in order to control undue fluctuations of money values. Besides direct buying and selling currencies in its coffers, among the measures that the U.S. Federal Reserve can take is boost the country’s money supply if so warranted. The Fed, which is the U.S. central bank, can also tighten money supply in order to influence the value of the dollar in the currency market.
There are many other factors that can affect foreign money supply and demand. The export or import performance of a certain country, for instance, will have an impact on the value of its currency. An excellent export record for a particular period of time can boost the value of that country’s currency. Conversely, if there is a serious trade imbalance, meaning that the country is importing substantially more than it is exporting to its trading partners, the value of its currency could depreciate.
The influx of foreign investments is also a determinant to the value of a country’s currency. With more investors coming in and converting their money into local currency, short-term money depreciation can result. Over the long-term though, countries which draw lots of foreign investors can achieve better exchange rates if and when the investments made turn into productive undertakings.