Reasons behind the fluctuation of currencies

1. Inflation Rate: One of the factors that may affect the value of a currency is the rate of inflation. Inflation is rate at which the price of goods and services increase. While a nominal inflation shows that the economy of a country is healthy, a major inflation doesn’t bode well though. Higher inflation may lead to instability in the economy, which in turn may increase prices due to which the value of a currency may fall significantly. The central bank of the country, to counter the problem, may then increase the interest rate, which would not only encourage more foreign investment but also compel people to spend less and save more.
2. Monetary Policy: The monetary policy of a country may decide the value of a currency in the global markets. A country may decide to increase or decrease their money supply which in turn may play a role in the value of the currency being decided. If the currency is available easily, which is if the money supply increases then its value may go down. To increase its value, the government may decrease the money supply and the rate of interest.
3. Economic and Political Situations: A country's political and economic circumstances can also affect a currency's value. Investors seek dependability of an investment as much as high interest rates. Because of this, the demand for the currencies of politically and economically stable nations is often higher, which raises exchange rates. This means that an investor will closely monitor economic indicators such as the unemployment rate, trade balance, housing start, etc. before deciding to invest. Strong political environments have a similar favourable effect on currency values. Political upheaval or international tensions reduce a nation's currency's appeal and decrease demand. On the other hand, if a new government signals stability or rapid economic growth for the future, a currency may gain value as people buy it in response to the positive news.
4. Recession: Interest rates are likely to drop in a recession, which will make it harder for the nation to attract foreign investment. As a result, the value of its currency drops when compared to those of other nations, which lowers the exchange rate. 

1. Debt owned by Government: Government debt is nothing, but the public debt owned by the government. The higher the government debt, the less likely it is to get foreign investment which in turn may lead to inflation and the value of currency dropping
2. Trade Deficit: Exchange rates can also fluctuate because of a trade deficit. The ratio of export prices to import prices is known as the terms of trade and is related to current accounts and balance of payments. If a country's export price increases faster than its import price increases, its terms of trade improve. More income is the result, and higher demand for the nation's currency raises the value of that currency. As a result, the exchange rate increases.
   

We will have a close look at the reasons why currencies may fluctuate.

Conclusion

These are some of the many factors which may determine the value of a currency in the global markets. It is important to understand the reasons which may lead to the value of currency falling or growing and understand that the current economic scenario may also lead to a currency value surging or slipping.