The factors can change the exchange rate of a currency are as follows:
1. Differentials in Inflation: As a general rule, a country with a consistently
lower inflation rate
exhibits
a
rising
currency
value, as
its
purchasing power increases relative to other currencies.
2. Differentials in
Interest Rates: A higher
or
lower interest rate offer lenders in
an
economy a higher or lower return relative to other countries respectively.
It results cause the exchange rate.
3. Current-Account Deficits: A current account deficit shows the country is spending more on foreign trade than it is earning, and it is borrowing capital from foreign sources to make up the deficit. The excess demand of foreign currency lowers the exchange rate and also it may occur oppositely.
4. Public Debt: A large public debt encourages inflation, and if inflation is high, the debt
will
be serviced and ultimately paid off with cheaper currency in the future.
Thus, it will determine the currency rate.
5. Trade imbalances: The size of any trade deficit between two countries will also affect those countries'
currency exchange rates. This is because they result in an imbalance of
currency reserves among the trading partners.
6. Political Stability and Economic Performance: Foreign investors inevitably seek out stable countries with strong economic performance in which to invest. Political turmoil, for example, can cause a loss of confidence in a currency and a
movement of capital to the currencies of
more stable countries.
7. Government intervention: The currency exchange rate may be imposed by its
government, i.e. wealth of the citizens, domestic production, country’s
labor cost.
Also it may depend on altering the monetary
and
fiscal policies, and by directly intervening in the currency markets and so on.
8. Speculators: It is typically have tremendous amounts of capital that they can use to either buy or sell any currency as cause the currency value will fluctuate.