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Understanding how currency exchange rates work is important for businesses, investors, currency traders and, of course, vacationers. But what causes currency exchange rates to fluctuate up and down? FX 101 breaks down the world of currency exchange, from the fundamental to the complex. Here are 10 factors that affect currency exchange rates: 1. Supply and Demand Currency can be bought and sold just like stocks, bonds, or other investments. And just like these other investments - and almost anything else you can buy or sell - supply and demand influences price. Supply and demand is one of the most basic economic principles, but nevertheless can serve as a good starting point to understand why currency exchange rates fluctuate. 2. Political Stability Currency is issued by governments. In order for a currency to retain its value (or even exist at all) the government which backs it has to be strong. Countries with uncertain futures (due to revolutions, war or other factors) usually have mu