ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Factors That Affect Currency and Foreign Exchange Rates

Updated on March 2, 2019


There are many factors that can cause currency changes, fluctuations and exchange rate determination. Foreign exchange rates can be unpredictable and there are many factors influencing exchange rates. As one of the key indicators monitored closely in the finance world, it is important to know why such changes occur. The exchange rate can often be used as an indicator to determine the health of an economy.

The image below details how much exchange rates can fluctuate in just a short span of 3 years.

Currency Fluctuations from 2011 to 2013
Currency Fluctuations from 2011 to 2013

Gross Domestic Product (GDP) and Economic Growth

The Gross Domestic Product is the total market value of all goods and services in a country. Thus, the Gross Domestic Product is an excellent and commonly used indicator to measure a country’s economic growth. If there is an increase of GDP, the national currency will appreciate as well. For example, between early 2011 to mid-2013, the real GDP of the U.S. increased from 15,052 to 15,679 billion dollars, a reason why the U.S Dollar appreciated against most foreign currencies during that period.

Interest Rates

Interest rates are a key factor to fluctuating exchange rates and adjusted by the central banks of respective economies. Higher or increasing interest rates provide higher returns for potential investors. This is commonly described as "hot money flows". Thus, this would attract foreign capital and result in an appreciation of the currency.

On the other hand, low or decreasing interest rates will cause the currency to depreciate as it will become less favorable to save money. This will decrease demand for the currency as spending (supply) increases. In addition, lower interest rates also encourages borrowing that can cause inflation to increase.


A country with a lower inflation rate will have an appreciating currency due to increase in purchasing power. For example, one of the reasons of the strong Franc is due to Switzerland’s low inflation rate. It has a Consumer Price Index of -0.70 in 2012, the lowest among 64 countries ranked.

On the contrary, high inflation will devalue the currency. For example, Argentina has one of the highest inflation rates in the world, believed to be as high as 30% (figures wildly vary depending on source). This has contributed to the steep depreciation of the Peso against the U.S. dollar, from $4.02 in February 2011 to $5.93 in November 2013. This is a depreciation of more than 32% in the Argentinian Peso vis-à-vis the U.S. Dollar in less than 3 years.

Balance of Payment and Balance of Trade

The balance of payment describes all financial transactions of a country. In general, a deficit would cause the currency to depreciate and a surplus would result in the opposite. For example, China has an active balance and surplus which contributes to the appreciating Renminbi.

The balance of trade describes the difference between a country’s exports and imports. A positive balance of trade means a trade surplus (i.e. more exports than imports) which increases currency value. This is because of increased demand in the country’s currency. The reverse, a trade deficit, will result in currency depreciation due to an outflow of monetary payments
(i.e. increasing supply) to other countries.


Public Debt

Deficit Financing or large-scale borrowing in layman's terms are usually performed by governments globally to engage in projects and funding. This has the benefit of stimulating the economy such as by creating jobs. However, a large amount of debt and deficit can be undesirable and a push factor for any potential investors.

This is because public debt and deficit can have undesirable consequences on the economy such as inflation. The debt crisis that occurred in Greece in 2008 was a result of such government deficits to finance various sectors such as the military. Eurostat estimated the huge debt has reached 15.6% of GDP in 2009, the highest among all countries in the European Union.

Political and Economic Stability

The political and economic stability of a country affects the currency value. Problems such as political turmoil and crimes can affect investors’ confidence as they look to invest their capital in other countries.

For example, in a survey conducted by Grant Thornton, it was revealed that 67% of private businesses in South Africa are withholding investment decisions due to political instability in the country. South Africa is also plagued with crime and security problems that can affect its currency value, highlighted by a -29.3884% depreciation since 2011.


This website uses cookies

As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

Show Details
HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
LoginThis is necessary to sign in to the HubPages Service.
Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
AkismetThis is used to detect comment spam. (Privacy Policy)
HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
MavenThis supports the Maven widget and search functionality. (Privacy Policy)
Google AdSenseThis is an ad network. (Privacy Policy)
Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
Index ExchangeThis is an ad network. (Privacy Policy)
SovrnThis is an ad network. (Privacy Policy)
Facebook AdsThis is an ad network. (Privacy Policy)
Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
AppNexusThis is an ad network. (Privacy Policy)
OpenxThis is an ad network. (Privacy Policy)
Rubicon ProjectThis is an ad network. (Privacy Policy)
TripleLiftThis is an ad network. (Privacy Policy)
Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
ClickscoThis is a data management platform studying reader behavior (Privacy Policy)