10 factors affecting the forex rate, that you should know!

factors affecting foreign exchange rate
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The foreign exchange rate, or the forex rate, is one of the most vital means thru which a country’s relative level of fiscal health is determined. A country’s forex rate offers a window to its financial stability, which is why it is constantly observed and analyzed. If you plan to send or receive money from abroad, you need to keep a keen eye on the money exchange rates.

The forex rate is “The rate at which one country’s currency may be converted into another.”.

It may vary daily with the fluctuating market forces of supply and demand of currencies from one nation. Because of these reasons, when transferring or receiving money internationally, it is significant to understand what determines the forex rates.

So here is a very quick peek into the most critical factors affecting the forex rate. Check it out and be a pro in estimating the forex rate like never before…

What are the ’10’ factors that directly affect the currency exchange rates?

Inflation rate:

Variations in market inflation cause variations in currency exchange rates. Inflation is a currency’s relative buying power compared to other currencies. For example, buying an apple in one country may cost one unit of money, but buying the same apple in a country with higher inflation may cost a thousand units of a different currency. Inflation differentials are why various currencies have varying purchasing power and, as a result, different currency rates. As a result, low-inflation countries tend to have stronger currencies than those with higher inflation rates.

Interest rate:

Deviations in interest rate affect currency value and dollar conversion rate. Inflation and exchange rates are inextricably linked to interest rates. Central banks use interest rates in various countries to control inflation. Setting higher interest rates, for example, attracts foreign capital, which boosts local currency rates. However, if these rates are kept too high for too long, inflation will begin to rise, resulting in currency depreciation. As a result, central bankers must change interest rates regularly to balance the benefits and negatives.


When a country experiences a recession, interest rates are probable to fall, decreasing its chances of obtaining foreign capital. Thus, its currency weakens, lowering the forex rate. Because interest rates often fall during a recession, a depreciation in the currency rate may occur. There is, however, no hard and fast rule. It is dependent on several factors. 

The Pound’s value plummeted by more than 20% between 2007 and 2009. The reason for this was to reclaim the UK’s lost competitiveness. The Bank of England dropped interest rates to 0.5 per cent in 2008 after the UK experienced a substantial current account deficit in 2007. The recession severely impacted the UK economy. According to the markets, interest rates in the United Kingdom were expected to remain low for a long time. Quantitative easing was pursued by the Bank of England (increasing the money supply). As a result, the likelihood of future inflation increased, making UK bonds less appealing.

Government debt:

A country with government debt is less expected to acquire foreign capital, leading to inflation and affecting the currency exchange rate. The majority of countries use large-scale deficit financing to fund their budgets. To put it another way, they borrow to support economic expansion. If government debt grows faster than the economy, it can raise inflation by preventing foreign investment from entering the country and depreciating a currency. A government may print money to finance debt in some instances, leading to inflation.

Terms of trade:

If the terms of business are favourable, it will positively affect the exchange rate and vice versa. The “terms of trade” ratio compares export prices to import prices and is connected to current accounts and the balance of payments. If the price of a country’s exports rises faster than its imports, its terms of trade have improved. Increased trade terms indicate increased demand for the country’s exports. This, in turn, leads to more export earnings and, as a result, increased demand for the country’s currency (and a rise in its value). The currency’s value will fall concerning its trading partners if exports rise at a slower rate than the price of imports.

Political stability:

If the country’s political status is stable, investors will invest more and finally affect the country’s foreign exchange rate. A country with a stable political environment attracts more foreign investment, which helps to keep the currency rate constant. On the other hand, poor political stability devalues a country’s currency exchange rate. Local economic drivers and financial policies are also influenced by political stability, two factors that can have long-term implications for a currency’s exchange rate. Countries with more stable political systems always have more robust and higher valued currencies like Switzerland.

Performance of political party:

It is also essential to attract investors to the country and impact the exchange rate. A political election, which takes place in practically every country, can significantly impact a country’s currency. Traders perceive elections as a singular instance of potential political instability and uncertainty, which often translates to more volatility in a country’s currency value. In most cases, forex traders would merely monitor pre-election surveys to understand what to expect and whether there will be any top-level changes. A change in government can result in a shift in the country’s inhabitants’ ideology, which usually translates into a new approach to monetary or fiscal policy, both of which are essential drivers of a currency’s value.

Economic performance:

Good growth in GDP increases the currency’s value, leading to better exchange rates and vice versa. Another factor that influences exchange rates is the economy’s health or performance. For example, a country with low unemployment means its residents have more money to spend, which aids in the development of a more robust economy. A stronger economy draws more foreign investment, which helps cut inflation and increase the country’s currency exchange rate. It’s worth mentioning that economic health is more of a catch-all word that includes a variety of other factors such as interest rates, inflation, and the trade balance.


Investors demand more of that currency if a country’s currency value is expected to rise. As a result, the currency’s value will increase and impact the exchange rate. If speculators believe the Pound’s value will increase in the future, they will demand a higher price now to profit. As a result of the increased demand, the price will climb. As a result, changes in the currency rate are frequently influenced by financial market attitudes rather than economic realities. For example, if markets anticipate news that makes an interest rate hike more likely, the Pound’s value would likely rise. Concerns that the UK will no longer attract as many capital movements outside the Single Currency contributed to the Pound’s depreciation after Brexit.

Country’s current account/ balance of payments: 

A country’s current account echoes the balance of trade and earnings on foreign investment. Balance of payments alters the exchange rate of its local currency. The current account deficit and the balance of trade are inextricably linked. The trade balance is compared to that of its trading partners in this scenario. When a country’s current account deficit is more significant than that of a trading partner, it can weaken its currency against that of that trading partner. As a result, currencies in countries with positive or low current account deficits tend to be stronger than those with significant debts.

All these factors control the foreign exchange rate variations. If you send or receive money regularly, being up to date on these factors will assist you in better evaluating the optimal time for international money transfer. Opt for a locked-in exchange rate facility to avoid any possible falls in currency exchange rates, guaranteeing that your money is exchanged at the same rate regardless of any factors that influence an unfavourable fluctuation.

Now, keeping all these in mind, analyze the forex rates before your forex transactions, remit money abroad, exchange your currency at the right time, and get the best forex deal ever!!!


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