What influences the currency exchange market?


Quick Answer

Interest rates, trade balance and economic growth are some factors that influence the currency exchange market. A few other factors include the inflation rate, the unemployment rate and a country’s political stability, according to currenciesfx.com.

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Full Answer

The rate of interest is directly proportional to the currency exchange. A low interest rate reduces investment deals from foreign countries. In time, the currency value drops in the global market. A high interest rate provides more opportunities for investment, and the currency value increases, states currenciesfx.com.

The trade balance is the difference between the export value and the import value of a country. If the resultant value is negative, the country is in a trade deficit and as a result the value of its currency is low. If the trade balance is positive, the country is said to have a trade surplus, and the demand for its currency is high, according to currenciesfx.com.

A high inflation rate in a country is an indicator of the high prices of commodities. If commodities are priced high, the currency value drops because purchasing power is reduced, notes currenciesfx.com. Likewise, a lower inflation rate increases the currency value. If a country has high rates of unemployment, the currency value is low and vice versa.

Political instability results in a weak economy and thereby decreases the currency value. On the contrary, a stable political economy involves less financial risk and increases the value of a country’s currency, states currenciesfx.com.

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