Why do Prices Change in the Foreign Exchange Market?
Money is a medium of exchange and a standard of value-in other words, a way to quantify how much something is worth. Foreign exchange simply means exchanging the currency of one country for an equivalent amount of the currency of another. Foreign exchange rates are not static, but change dynamically-sometimes many times within a single minute.
Why does it take more dollars to buy a euro this week than it did last week? Why would it cost you more today to buy a cup of coffee in another country than it did before, even though the price has remained the same there? The answer has to do with the value of a country's currency relative to the price of another currency.
What Determines the Rate or Value of a Currency?
Currencies, just like any other commodity that can be bought or sold, are subject to the laws of supply and demand. When more people want a particular currency, the cost of the currency in terms of other currencies will go up. When demand decreases or people do not want to hold a country's currency, the value will go down.
International Trade and Investment
One factor that directly affects demand for a currency is international trade. For instance, if I buy a Japanese car in the US, I give dollars to my dealer, who gave dollars to his distributor, and so on. But before the profits are banked by the carmaker in Japan, they are converted into Yen. There is a surge of buying of Japanese cars this month, the result is going to be increased demand for Yen-which will in turn cause an appreciation in the Yen's value.
An increase in international investment into Japan would have the same effect, since more money is being converted into Yen to purchase Japanese assets.
Profit by Trading Currencies
Currency traders can buy and sell currencies, similar to how stock traders buy and sell stocks, to profit from moves like the ones in the Yen and the New Zealand dollar graphs on this page. Lean More.