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 currency values?

Interest rates, inflation, and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and interest rate changes have an impact on inflation and currency values. Higher interest rates offer banks and other lenders a better return relative to other countries.

How do higher interest rates affect exchange rates?

Higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others, or if additional factors drive the currency down. The opposite relationship exists for decreasing interest rates.