Currency fluctuations are simply the ongoing changes between the relative value of the currency issued by one country when compared to a different currency. These changes are something that occur every day and affect the relative rate of exchange between various currencies on a continual basis. It is these fluctuations that investors in currency exchange deals look to closely in order to generate a profit from their investments.
It is important to note that currency fluctuations may appear as both upward and downward movements. When currencies that are purchased by an investor demonstrate an upward movement in comparison to the currencies used to make the purchase, there is opportunity to realize a significant return on the transaction. At the same time, if the rate of exchange remains somewhat flat, or if the base currency actually increases in relative value, the investor stands to realize no return or actually lose money in the deal.
There are a number of factors that can lead to such fluctuations. One key factor is the current state of the economy associated with a given country. If the general perception is that a country is going through a phase where severe conditions will exist for an extended period of time, the currency of that country is likely to lose value in comparison to other countries. When it appears that the currency of a country will only remained depressed for a limited amount of time, and an investor can afford to hold on to the currency in the interim, he or she may realize a substantial profit when the country recovers and the relative value of the currency rises.
Political issues may also affect the nature of currency changes, in that a lack of confidence in a new government may temporarily diminish the value of the nation’s currency on the open market. Once confidence is restored, the currency will tend to rise and investors can consider it to be a worthwhile investment once again. When currency fluctuations are due to political factors, the impact is often short term, although it can be long term as well.