Top 5 Factors Affecting Exchange Rates


Exchange rates change by the second. Understand the  dynamics that affect them.

Currency changes affect you, whether you are actively trading in the foreign exchange market, planning your next vacation, shopping online for goods from another country—or just buying food and staples imported from abroad.

Like any commodity, the value of a currency rises and falls in response to the forces of supply and demand. Everyone needs to spend, and consumer spending directly affects the money supply (and vice versa). The supply and demand of a country’s money is reflected in its foreign exchange rate.

When a country’s economy falters, consumer spending declines and trading sentiment for its currency turns sour, leading to a decline in that country’s currency against other currencies with stronger economies. On the other hand, a booming economy will lift the value of its currency, if there is no government intervention to restrain it.

Consumer spending is influenced by a number of factors: the price of goods and services (inflation), employment, interest rates, government initiatives, and so on. Here are some economic factors you can follow to identify economic trends and their effect on currencies.