What factors affect currency exchange rates?

Here are some of the top factors that can affect an exchange rate: 1. Inflation Rates Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another's will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low.

How do interest rates affect foreign currency?

This attracts foreign capital looking to earn at higher rates. The result is that the country’s foreign exchange rate rises, making its currency stronger. Interest rates are directly correlated to inflation as well as exchange rates. A country’s central bank will try to influence inflation or exchange rates via the interest rate mechanism.

How does currency exchange rate affect exports?

If a country’s exports are growing at a higher rate than its imports, it’s a good sign for its currency exchange rate. Higher exports mean increased demand for the country’s currency and therefore its value. Inflation, interest rates, and forex rates are correlated. Each of these factors can affect the other two.