Why Do Currency Exchange Rates Fluctuate?

Before understanding the reasons behind fluctuation of currency, you need to understand what an exchange rate and Forex trading is. An exchange rate is a rate of a currency against other country. It depends upon various factors; the major factor is competitive trade and economy advantages. Just like any other commodity its value is dependant upon demand and supply. Higher the demand of the currency, the higher the value it becomes. Currencies like an Indian rupee which is not specifically traded on exchanges; its value is dependant upon the capital inflows.

What is appreciation and depreciation of currency?

Appreciation of currency signifies that Indian rupee is appreciating in relation with dollar for example earlier 1$= Rs 45, but now 1$= Rs 54, it means the value of rupee has depreciation against dollar. Similarly, if 1$= Rs 50, it means the rupee is appreciating against dollar.

Why rupee is fluctuating against dollar?

  • The major reason why Indian Rupee is fluctuating against dollar is unstable political scenario, is the major cause.  The ruling party is responsible for so many scams like coal scam, 2G scam, commonwealth games scam, telgi scam, IPL scam, to name a few.
  • The other major factor is policy paralysis- The govt is not been able to make staunch policies regarding FDI or other important things.
  • What acts as a classic lead indicator of depreciation of currency is lack of coalition support. Be it any decision whether it is railway budget or removing rail minister or current presidential election, coalition govt is there to oppose policies of govt.
  • Other major factor is India is also sliding into a new recession. Although optimists believe that only, rich countries are undergoing double dip recession. We have strength and resilience that is actually stemming the rot.
  • Global situations – We are not protected by global economic situations like euro crisis, it has inflicted a sense of displeasure among all the leading economies, especially U.S.
  •  We can sum up in this way when there are large sellers of the currency the exchange rate dip, so the same is happening to Indian currency. It simply does not mean that people are not interested in money, but it simply means people don’t want to keep wealth in form of currency rather they want to hoard money in some other form.
  • The other major reason downfall of rupee is lower credit rating by standard rating agencies like Standard and Poor and Fitch. It has lowered the economic outlook, thus creating fear in minds of  investors.
  • Majority of the dealers are of opinion that RBI action or intervention is missing in the forex market even as rupee continues to free fall in a day.
  • The other reason is crude falling to nearly an 18 month low of $90 a barrel.
  • The treasury managers are saying that rupee can even breach a level of 58 per dollar by next week.

Is Govt doing something?

Many people are apprehensive about the Govt itself, but govt is adopting following measures to enrich the economy.

Govt is trying to gain 51% FDI support from non UPA states. This decision was held up by UPA rally, in the wake strong opposition by coalition and other parties. Commerce minister has written to various CM’s of Punjab, Odhisa, Utta Pradesh, asking them to understand intrinsic merit of the proposal.

Ikea to pump money- Swedish Furniture Company is planning to invest in India with Rs 10,500 crore in a single brand retail venture. The commerce ministry said that company has sought the permissions to set up a 100% Indian venture.

About Author : This is a guest post written by Mircea Giurca who does research on money converter calculator. He suggests his readers to visit his website to calculate and convert currencies.


Vijayraj Reddy is founder & editor-in-chief of Startmysalary.com, a financial blog which helps people to earn money, invest money and save money.

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7 Responses to “Why Do Currency Exchange Rates Fluctuate?”

  1. Nice post Vijay and you made it quite comprehensive. Tell me one things or should i say clear one of my all time confusions that is the gold rate fluctuation anyways connected to currency rate fluctuations?
    Shiwangi peswani recently posted..Best Photo Editing Software Free DownloadMy Profile

  2. Praveen says:

    wow so nice & knowledgeable post regarding Exchange Rate Fluctuate. I like your post, thanks to sharing nice information.

  3. PrIyAnGsHu says:

    Great explanation Mircea. I really did not know about these facts behind currency rates fluctuation. It has helped me a lot.

  4. Ehsan Ullah says:

    Hello Vijayraj,

    Great blog here and I’m sure It’s making great income for you. I’ve landed here just to check your work and I must say you’re doing great. I don’t really have knowledge about your topic so can’t say anything lol.

    BTW, Thanks for your comment on my blog.
    Ehsan Ullah recently posted..Google SiteLinks: How To Get Google Sitelinks For Your BlogMy Profile

  5. And on the other hand you have the Chineese Yuan fixed to the US Dollar … Thanks for the write-up!
    Jessica Johnson recently posted..49 FICO Credit Score Ratings the Lenders UseMy Profile

  6. Rob McCance says:

    Good post.

    I’m a FX trader and it definitely comes down to understanding both sides of the global economic picture.

    Or you can give up on that seemingly impossible task and try to analyze what the charts are telling you.
    Rob McCance recently posted..The River Club Membership FeesMy Profile

  7. Denise Gabbard says:

    Hi Vijay– I just realized that you had commented on a guest post on mine on the Kikolani site, and wanted to stop by and say hello. Nice article on a fairly tough subject here, but you make it a little easier to understand. Wouldn’t it be awesome if we could somehow all agree on a standard, and everyone use it around the world? Sure would simplify our lives as we move further into a global economy.

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