Nowadays, some currency rates are jumping very high while others strive to record low rates.
Exchange rates are constantly fluctuating, now in this post, we focus on major reasons that could cause a currency exchange rate to fluctuate.
The US dollar is the most traded currency in the whole world and also the euro is the second most popular worldwide.
So, therefore, we will be dealing with two main economies in this article which are the European and American
The main factors that might cause the rise and fall of any currency exchange rate include;
Political and economic conditions
Political and economic conditions are one of the factors that might lead to the rise or fall of a currency exchange rate.
Most of the investors usually enjoy high-interest rates in countries that are both politically and economically stable.
This is probably the main reason why most countries that are stable politically and economically usually their currencies have higher demand which may lead to the higher exchange rate.
Any political issue can as well cause euro USD exchange rate to fluctuate on the market, for example, Brexit, crises in European countries which lead to political instability and therefore leading to a fall in the euro value.
Also sometimes statements from politicians and other senior government officials might as well impact the exchange rate. For example, a statement from the US Treasury Secretary Steven Mnuchin when he said that “a weaker dollar is good for the US.” The statement leads to the immediate fall of the USD.
Rate of inflation
This is another factor that can lead to the fluctuation of the euro USD exchange rate.
The term inflation generally is referred to as the rate at which the general price of goods is increasing highly.
The high rate of inflation can lead to economic instability and hence leading to the fall of any currency value.
If the inflation rate is too high, the central bank may counteract a problem raising the interest rates.
An increase in interest rates makes the currency value to appreciate while the fall in the interest rates can as well lead to the currency value to depreciate.
Monetary policy
Another main factor affecting the euro USD exchange rate is the monetary policy.
Many central banks attempt to control the demand for currency by increasing or decreasing the money supply and interest rates.
The money supply refers to the currency in circulation. As a country’s money supply increases and the currency become more available, the price of borrowing the currency goes down.
The interest rate, on the other hand, refers to the money that can be borrowed. Therefore with a low-interest rate, many people and businesses are willing to borrow money hence leading to the growth of the economy.
