Several factors within a nation can have a significant effect on the currency exchange
rates and the relative importance of each is the subject of debate; however, it is important
to be aware of some of the key fundamentals.
Inflation: It is generally believed that countries with consistently lower inflation exhibit a
rising currency value while countries with higher inflation may see currency depreciation.
Interest Rates: High interest rates may attract foreign investors and that can lead to an
exchange rate increase while the opposite scenario is possible in a country with low
interest rates.
Overall Economic Conditions: Everything from a country’s balance of trade to the size of
their deficit or surplus can serve as a barometer of the condition of the country and the
likelihood of default. Investors look for countries with stronger economic foundations
and the better the economic foundation of one country versus another may increase the
value of the country’s currency.
Perception: The so called “flight to quality” exists within foreign currencies as investors
will often seek what they perceive as “safe haven” currencies during times of political or
economical instability.
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