What Drives Exchange Rates? | Western Union GB Blog (2024)

What causes exchange rates to change? If you need to change money into another currency, you might see that exchange rates keep fluctuating. This means you could get more for your money one day than you would the next.
So, what affects exchange rates? The main factors causing currency fluctuation include:

  • Inflation
  • Interest rates
  • Recession
  • Speculation;
  • Political stability
  • Current account deficits
  • Terms of trade
  • Government debt
  • Stock markets

Here, we’ll dive into these main causes of currency fluctuation to see what causes exchange rates to change.

Inflation

One of the main factors that can cause currency fluctuation is inflation. When a country experiences high inflation, its currency becomes less valuable because it can buy fewer goods and services. This makes it less attractive to investors, and the demand for that currency decreases, causing its value to drop.
On the other hand, if a country has low inflation, its currency becomes more valuable, and it may attract more investors.

Interest rates

Another factor driving exchange rate fluctuations is interest rates. When a country raises its interest rates, it can attract more foreign investment as investors seek higher returns. This can increase the demand for that currency and cause its value to rise.
However, when a country lowers its interest rates, it may become less attractive to investors. This can result in a decrease in demand for that currency and cause its value to fall.

Recession

Economic recessions can also have a significant impact on exchange rates. When a country experiences a recession, its economy may shrink, and interest rates are likely to fall. This is often followed by a decrease in consumer spending, which can negatively impact the country’s currency value.
On the other hand, if a country’s economy is growing, investors may see it as a safe and stable investment. This results in the currency becoming more valuable.

Speculation

Another force impacting currency fluctuation is speculation. Investors may buy or sell currencies based on their expectations of future economic growth or political stability. If investors believe that a country’s economy will improve, they may buy its currency, causing its value to rise.
If investors expect a country’s economy to decline, they’re more likely to sell its currency, causing its value to fall.

Stock markets

Stock markets can also shape exchange rates. When a country’s stock market is performing well, it can attract foreign investment, which increases demand for that country’s currency.
However, when a country’s stock market is performing poorly, the opposite happens. It may deter foreign investment, causing the demand for its currency to decrease.

Political stability

Political stability can also have a big impact on currency fluctuation. When a country has a stable government, it gives investors a sense of security. However, if a country experiences political turmoil or instability, it can cause uncertainty and decrease investor confidence, which can negatively impact the currency’s value.

Current account deficits

Current account deficits occur when a country imports more than it exports. When a country has current account deficits, the country has what’s known as a net outflow of money.
It can cause a decrease in demand for the currency as it may be perceived as less valuable due to its reliance on imports.

Terms of trade

Terms of trade refer to the ratio of export prices to import prices. When a country’s terms of trade improve, it means that it’s earning more from its exports than it’s spending on imports. This can increase demand for the country’s currency, causing its exchange rate value to rise.

Government debt

Government debt is another factor that can impact exchange rates. When a country has high levels of government debt, it can make investors nervous, as it may be seen as a riskier investment. This can cause the demand for the country’s currency to decrease, causing its value to fall.

Keep track of currency fluctuation with exchange rate alerts

If you’re waiting for a favourable exchange rate before you change or send money, there’s an easy way to keep track of currency fluctuations. Instead of constantly checking the exchange rate, you can set an alert for when it changes to your desired rate.
With Western Union, you can set up exchange rate alerts to be notified as soon as it changes to the rate you’re waiting for. You can then send money to loved ones abroad right away to get the most foreign currency for your money.
To get started, register for a free account today.

What Drives Exchange Rates? | Western Union GB Blog (2024)
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