Question

how and why foreign exchange rates fluctuate?

Answer 1

Fluctuations in foreign exchange rates are caused by changes in the supply and demand of international currencies.

Changes in demand and supply for currencies result from the demand and supply of currencies for trade purposes, and for capital flows.

Another way of looking at the exchange rate is as the price of buying the currency of one country with that of another country.

Currency price can also be affected by the interest rate in one country compared with interest rates of other countries:

Because
• investors want to invest where interest rates are higher.
• raising the rates can encourage an inflow of capital, increasing demand for the currency and leaving to a rise in its exchange value.