Why do exchange rates fluctuate?
Show answer & explanation
Answer: Supply and demand for currencies
Banks change rates randomly — Wrong. Exchange rates aren't random—they respond to economic forces. Central banks may intervene occasionally, but rates primarily reflect currency supply and demand based on trade, investment flows, interest rates, and economic performance.
Tourism affects currency value — Wrong. Tourism does affect demand for currencies, but it's a small factor. Major drivers are international trade (imports/exports), investment flows, interest rate differences, inflation rates, and economic growth expectations.
Supply and demand for currencies ✓ — Correct! Exchange rates reflect currency supply and demand in global markets. When a country's economy is strong, exports high, or interest rates attractive, demand for its currency increases, raising exchange rates. Weak economy, high inflation, or political instability decrease demand, lowering rates. It's like any market—price fluctuates with supply/demand.