The Pros And Cons Of Currency Fluctuation

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The value of a currency is the worth of it as compared to or with other currencies. The value of a currency against other currencies is the exchanged rate of that currency. Exchange rate management or control in countries differs. While some practice fixed exchange rate regime, others also allow the forces of demand and supply to determine the value (price) of the currencies. Currency fluctuations normally happen in countries where they practice the free exchange rate system. Currency fluctuation is a situation in an economy where the value of the value of the currency rises, fall or both frequently against its major trading currencies for a period. While some currencies fluctuate freely against each other, such as the Ghana Cedi, Japanese Yen and the US Dollar, others are tied. They may be pegged to the value of another currency, such as the US dollar or the Euro, or to a basket of currencies (Farlex, 2009).

Changes in interest rate affect currency value and exchange rate. Interest rate and exchange rate are all correlated. Increases in interest rate cause a country 's currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates and vice versa also applies.

Changes in inflation cause changes in currency exchange rates. A country with a lower inflation rate will see an appreciation in the value of its currency. The prices of goods and services increase at a slower
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