6 Factors That Influence Exchange Rates

1. Differentials in inflation
   1. Lower inflation rate: rise in currency value
   2. Higher inflation rate: decrease in currency value
2. Differentials in interest rates
   1. Higher interest rates: higher returns which makes that country's currency more attractive
3. Current-account deficits
   1. Deficit: importing goods more than exporting goods
   2. In order to make up for the deficit, a country typically borrows capital from another country and this lowers their currency value
4. Public Debt
   1. The more debt a country has, it increases their inflation rate and makes that country's currency unattractive
5. Terms of trade
   1. If the price of a country's exports rise more than the price of their imports, that increases the currency value
   2. If the price of a country's imports rise more than the price of their exports, that decreases the currency value
6. Political stability and economic performance
   1. Strong political and economic performance in a country increases their currency's value