What Factors Affect the Exchange Rate of the Dollar Compared to Euro?


Quick Answer

Differences in interest rates, current account deficits, public debt and inflation differences affect exchange rates. The state of political stability, economic performance and the terms of trade are also key factors in determining exchange rates.

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Full Answer

A country's interest, inflation and exchange rates combine to impact the value of its currency in the global marketplace. If a country has consistent low inflation rates, it typically has a higher trading value among other countries. Higher interest rates give countries an advantage when exchanging money among other countries that have similar interest rates. If a country has a substantially low interest rate, exchange rates are decreased.

Public debt is seen as a major indicator of how a country's rate of inflation fluctuates. If a country has a large deficit to cover domestic projects and government funding, the chances of inflation increasing are high. Once this common trend occurs, the exchange rate begins to decrease among foreign countries. This is seen as a high-risk exchange as the chance of default is increased.

As a country enters into political turmoil, the economic performance of the country is put in jeopardy. The effect of this decreases how confident other countries are in a nation's ability to back up its money. The end result is that exchange rates decrease.

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