The exchange rate between currencies fluctuates daily.
Currency fluctuations are simply the continuous changes between the relative value of the currency issued by one country compared to a different currency. These changes occur every day and continually affect the relative exchange rate between the various currencies. It is these fluctuations that investors in foreign exchange businesses watch closely in order to generate profit from their investments.
Currency fluctuations can affect a traveler’s purchasing power.
It is important to note that currency fluctuations can appear as both up and down movements. When the currencies that are purchased by an investor show an upward movement compared to the currencies used to make the purchase, there is an opportunity to earn a significant return on the transaction. At the same time, if the exchange rate remains somewhat stable, or if the base currency actually rises in relative value, the investor will either have no return or will lose money on the transaction.
Currency fluctuations are caused by changes in the value of a unit of money.
There are several factors that can lead to these fluctuations. A key factor is the current state of the economy associated with a particular country. If the general perception is that a country is going through a phase where severe conditions will exist for a long period of time, then that country’s currency is likely to lose value compared to other countries. When it appears that a country’s currency will only remain depressed for a limited period of time, and an investor can afford to hold it in the interim, he or she can make a substantial profit when the country recovers and the relative value of the currency goes up.
Political issues can also affect the nature of currency changes, as a lack of confidence in a new government can temporarily lower the value of the country’s currency on the open market. Once confidence is restored, the currency will tend to rise and investors may consider it a worthwhile investment once again. When currency fluctuations are due to political factors, the impact is usually short-term, although it can also be long-term.