ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Reasons for Change in Currency Value

Updated on January 2, 2014
International Currencies
International Currencies
Currencies
Currencies

It's a belief widely held that speculators are the reasons for swings in currency exchange rates. However, this is only partly true. There are in fact, other reasons for the fluctuation in values of currencies.

The Forex market is a huge business, in fact billions and billions of dollars flood into this market on a daily basis. In general, most people buy foreign currencies simply because they need to purchase goods or services from other countries. For example, a U.S. importer may purchase Japanese yen to buy Japanese autos.

A Chinese financial investor purchase Australian dollars to invest in the Australian stock market. However, there is another group of participants in the currency market -- speculators --that buy and sell foreign currencies in the hope of reselling or re-buying them in the future at a profit.

Factors Influencing Exchange Rates Fluctuation

Based on findings, during the late 1997 and 1998, speculators were much in the news when they were widely accused of driving down the values of several currencies which include the south Korean won, Thailand baht, Malaysian ringgit, and the Indonesian rupiah. Within a month, the value of these currencies declined as much as 50 percent. Beyond all reasonable doubts, speculators did contribute to the swiftness of these declines. The expectation of currency depreciation or appreciation, can be self-fulling.

If speculators for example, expect the euro to be devalued or to depreciate, they quickly sell euro and buy currencies which increase in relative value. The sharp increase in the supply of euro indeed reduces its value; this reduction then may trigger further selling of euro in expectation of further declines in its value.

But economist believe that speculations aren't generally the only underlying causes for changes in the value of currencies, rather, it's the change in economic realities. In fact, they believe that was largely the situation with the Southeast Asian countries in which actual and threatened bankruptcies in the financial and manufacturing sectors undermined confidence in the strength of the currencies.

If or when Speculators are anticipating eventual declines in currency values, they simply speed up that decline. However, a reduction in value of those currency probably would have happened with or without speculation. Moreover, on a daily basis, Speculators clearly has positive effects in foreign exchange markets.

when temporary weak demand or strong supply drives down the value of a currency, Speculators quickly buy that currency, adding to its demand, and causing its value to rise. Whenever there is a strong temporary demand or a weak supply of a particular currency, this will cause the price of that currency to increase in value. At this point , Speculators will sell this currency, causing the supply of this currency to increase, thus reducing its value.

In this way, Speculators somewhat levels out supply and demand. This stabilization of exchange-rate in turn aids international trade a great deal. In short, although Speculators in currency markets occasionally contribute to swings in exchange-rates, on a daily basis, they also play a positive role in currency markets.

Below are examples of several factors which can change the demand for or supply of a particular currency thus altering the exchange rates, according to economist:

Scenario 1A. When There is a change in Taste:- If Japanese autos were to decline in popularity in the U.S. (result - Japanese yen would loose value or depreciate,and the U.S.dollar would gain value or appreciates.)

1B. If for some reasons, German Tourists have decided to flock to the U.S. (result - This would cause the U.S. dollar to appreciate and the German marks to depreciate)

Scenario 2:- In the case of a change in Relative Income:- Say for example, England encounters a recession, causing its import to reduce, while U.S. real output and real income surge, thus increasing U.S. imports (British pound would appreciate whereas the U.S. dollar would depreciate).

Scenario3:- Change in Relative Prices:- Say, Germany have experienced a 3% inflation rate compared to a 10% rate experienced by Canada(German mark would appreciate, while the Canadian dollar would depreciate).

Scenario4:- A Case Where There is change in relative Real Interest Rates:- Say the Federal Reserve has made the decision to drive up interest rates in the U.S, while the Bank of England has taken no such action(Then the U.S. dollar would appreciate; British pound would depreciate).

Conclusion

To summarize,based on the scenarios above, Speculators alone don't contribute to the swings in currency exchange rates, other socioeconomic factors within different regions or countries also play a huge role.

(C)I.M. 2012..x.x.x

Comments

    0 of 8192 characters used
    Post Comment

    • mackyi profile imageAUTHOR

      I.W. McFarlane 

      6 years ago from Philadelphia

      Thanks for your input wheelinallover. Hopefully some people will have a better understanding of how the supply and demand principle contributes not only to the periodic changes in the value of currencies, but also to the changes in price of goods and services.

    • wheelinallover profile image

      Dennis Thorgesen 

      6 years ago from Beatrice, Nebraska U.S.

      We believe money is made and lost daily by those who speculate. It has been a known fact that currency values will change based on supply and demand. As you said Governments can change the value just by passing laws, or raising interest rates. The wisest move for people considering this is never invest more than you can afford to lose. Voted up interesting and SHARING on twitter.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)