Why do Currency Values Change?

Currency values change due to a variety of factors, including economic, political, and social influences. Understanding these factors can help individuals and businesses make informed decisions about foreign exchange transactions. Here are some of the key factors that influence currency exchange rates:

1. Interest Rates: Interest rates are one of the most significant factors that affect currency exchange rates
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   . When a country's central bank raises interest rates, it attracts foreign investment, which increases demand for the country's currency and causes its value to rise. Conversely, when interest rates are lowered, foreign investment decreases, and the currency value falls.
2. Inflation: Inflation is another critical factor that affects currency exchange rates
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   . When a country experiences high inflation, its currency's purchasing power decreases, which leads to a decrease in demand for the currency and a fall in its value. Conversely, when inflation is low, the currency's purchasing power increases, leading to an increase in demand and a rise in its value.
3. Political Stability: Political stability is essential for a country's economic growth and stability. When a country experiences political turmoil or instability, it can lead to a decrease in foreign investment, which can cause its currency value to fall
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   . Conversely, when a country is politically stable, it attracts foreign investment, which can cause its currency value to rise.
4. Economic Performance: A country's economic performance is another significant factor that affects its currency value
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   . When a country's economy is growing and performing well, it attracts foreign investment, which can cause its currency value to rise. Conversely, when a country's economy is struggling, foreign investment decreases, and its currency value falls.
5. Trade Balance: A country's trade balance is the difference between its exports and imports. When a country exports more than it imports, it has a trade surplus, which can cause its currency value to rise
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   . Conversely, when a country imports more than it exports, it has a trade deficit, which can cause its currency value to fall.
6. Speculation: Sometimes, currency values are affected by the confidence (or lack thereof) traders have in a currency
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   . Currency changes from speculation tend to be irrational, abrupt, and short-lived. For example, traders may devalue a currency based on an election outcome, especially if the result is perceived as unfavorable for trade or economic growth.
7. Government Intervention: Governments have a collection of tools at their disposal through which they can manipulate their local exchange rate
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   . Primarily, central banks are known to adjust interest rates, buy foreign currency, influence local lending rates, print money, and use other tools to modulate currency exchange rates. The primary objective of manipulating these factors is to ensure favorable conditions for a stable currency exchange rate, cheaper credit, and economic growth.

In conclusion, currency values change due to a variety of factors, including economic, political, and social influences. Understanding these factors can help individuals and businesses make informed decisions about foreign exchange transactions. By keeping an eye on these factors, one can make better decisions about when to buy or sell foreign currency.

Citations:

[1] https://www.investopedia.com/trading/factors-influence-exchange-rates/

[2] https://www.investopedia.com/terms/e/exchangerate.asp

[3] https://www.elibrary.imf.org/view/journals/024/1977/002/article-A002-en.xml

[4] https://www.compareremit.com/money-transfer-tips/key-factors-affecting-currency-exchange-rates/

[5] https://canamcurrencyexchange.com/9-factors-that-influence-currency-exchange-rates/

[6] https://www.ukessays.com/essays/economics/the-changing-value-of-the-currency-economics-essay.php