Factors That Affect Foreign Exchange Rates

Economic changes have major effects on the forex trading market.  The foreign exchange rate is one of the most important means to measure the level of economic health in a country or state. The foreign exchange rate in a country provides a path for economic stability. This is the reason why foreign exchange in all places is watched or analyzed.  If someone needs to send or receive cash from a person living in a different country and continent, they need to keep an eye on the exchange rates of the currencies.

The following are leading factors that influence fluctuations and variations in foreign exchange rates.

Inflation rates

The changes in market inflation cause major changes in the currency exchange rates.  A country that has a lower inflation when compared to others tends to see an appreciation in the currency value. When the inflation lowers, the prices of goods and services will increase at a very slow rate. Countries that have a consistently low inflation rate will see a rise in currency value while a country with high inflation will exhibits depreciation in currency value plus high interest rates.

Interest rates

The changes in interest rates can and will affect the currency value and exchange rates. The interest rates, forex rates and inflation are very much correlated. The increase in interest rates causes the currency of a country to appreciate. This is because high interest rates provides high trading rates for the brokers, which then attracts more foreign capital and causes rise in the exchange rates.

The country’s current account and balance of payments

The countries account reflects the balances and earnings on trades and foreign investments. It has the total number of imports, exports, debts and transactions of the country. A deficient in the current account as a result of spending is a representation of the currency on importing products as opposed to exporting. The balance of payments reduces the exchange rate of the country.

Government debt

Public or national debts by the government have a major effect of the exchange rates.  If your country has government debt, it is less likely going to get foreign capital through trading which leads to inflation.

The terms of trade

This is related to the balance of payments and currents accounts. It is basically the ratio of export to import prices. The country’s terms of trade will improve if the export prices become great at a faster rate than the import prices. This causes high revenue and demand for the currency which then increases the value of the currency.


If the value of the currency is expected to rise, corporations and investors will demand it in order to create more profits. The increase in demand also causes a consecutive rise in the value of the currency making it even more valuable.

Final word

The exchange rate is the level at which a country’s currency can be converted to another currency. The exchange rate, with the ever-changing market forces and currency demand, fluctuates on the daily. This prompts you to understand what triggers the exchange rates especially when you are sending and receiving money or involved in forex trading.