Why do currency exchange rates between various currencies fluctuate?



Why do currency exchange rates between various currencies fluctuate?

In: Economics

Profit, tourist stupidity/vulnerability, countries have different income levels that change, and also interest rates due to foreign investment.

Demand for currency usually lines up with demand for product. So if a country has a product you want, then you need their currency to buy that product. So you need to exchange your currency for theirs. As demand for products across different countries change, so does the demand for their currencies. More I want your stuff, the more of your currency I need to buy it increasing the exchange rate.

Currency demand can get complicated as markets become more global and different countries manage intermediate production steps and/or raw materials.

Furthermore, most countries have independent control over how much currency they have (European union countries are the most notable exception, I think). More currency means higher exchange rate, all other things being equal. My bills buy fewer of your bills cause mine are more plentiful.

This where issues of countries with hyper inflation (printing too much money) and deflation (not printing enough money) can come from.

TLDR: varying supply of currency (printing or not printing money) and varying demand for international products are big reasons exchange rates move around.

Edit: missing words due to fat thumbs