Exchange Rates Of A Currency Can Be Volatile

Exchange rates of a currency, which are generally expressed in terms of American dollar, are not stable. The reasons for this are many but the most important reason is the demand of the particular currency in the international market. This demand in turn depends upon many factors including the economic condition of the country, its exports and imports, political stability and the monetary policies of the government of that country. As these factors do not remain the same all the time, the exchange rates expressed in terms of dollar also keep on changing.

If everything is working as per the doctor ordered, exchange rates remain stable, and sometimes even appreciate and the currency becomes strong in terms of US dollar. However, no country is in favor of its current exchange rate changing, even it is on the upswing. There are economic reasons behind it. If a currency becomes strong, exports from that country become costlier as foreigners now have to spend more dollars for buying goods from that country. This is a bad situation for the growth of the economy, as slowing down of exports sends bad signals for the health of the economy.

Similarly, depreciation of a currencys exchange rate beyond a level starts hurting the importers. It simply means they have to shell out more money to import the items they were importing earlier. As no country is self sufficient and has to depend upon other countries to fulfill its requirements, it finds it difficult to import even essential items, which is reflected in the health of the economy. There are countries which are badly lacking in natural resources and need to import lots of items from foreign countries. Such countries feel the pinch when the exchange rates of the currency fall below a certain level.

It is this change in the exchange rates of any currency which is the basis of a Forex market and the traders buy a currency when it falls in value and sell it again when it gets appreciated. This business is just like the share market except that the speculation is on the rates of a pair of currencies instead of shares or stocks of companies. In the last few decades, Forex market has become gigantic in proportions and it now bigger than the stock markets of the world.

While those investing in the Forex market are happy with the volatility of a currency and make lots of money when its value changes, the majority of the population of that country suffers as the delicate balance between the exports and imports of the country is disturbed.

The exchange rates of a country are most of the time decided by the demand and supply forces in the market and they keep on changing. Market forces are auto correcting in nature and many analysts feel that the exchange rates decided by the market are closer to reality and reflect the real value of the currency rather than the rates which the government tries to project as they are for its own economic purposes.