The five main factors that shift a currency's value
The value of currencies is usually far from stable, often shifting by pretty significant amounts from day to day. There are plenty of factors that influence these movements, and getting to know a little more about them can help you make informed decisions about your international money transfers. That's why we've put together this run-through of the five main reasons your euros, dollars and pounds are worth more – or less – one day than they were the day before.
1. Inflation
Increasing domestic prices indicates a nation's currency is getting weaker relative to other countries, shifting its exchange value downwards. A handy reference point is that if the price of a loaf of bread or pint of milk is rising in that country, the value of its currency is probably falling.
2. Interest rates
Low inflation and a strong currency typically go hand in hand with higher interest rates. High rates drive currency value up because they promise good returns to investors and lenders, encouraging people to buy up the currency, increasing its value. It's worth taking a look at the interest rate set by the central bank, which determines all the others, including ordinary people’s mortgage rates. If this ‘base rate’ is high, the currency will also probably be shifting upwards in value.
4. Political stability
This is one of the easiest currency indicators to spot. Investors like to know their money’s safe, so the more stable the country, the more investment it’s likely to see, contributing to a higher currency value.
4. Current account strength
If a country is spending more on imports than it’s getting in from exports, it will have what’s called a ‘current account deficit’. It’s a lot like going overdrawn on your own current account, and unless the country has substantial reserves, means it will need to borrow from other countries. This generally reduces its currency’s value.
5. Debt levels
Last on the list is the amount of public debt a country has. Lots of public debt leads to inflation, especially if more currency is being put into circulation to cover the debt. Really high debt of over 60% of GDP will also be a big turn off for foreign investment, further decreasing the value of the currency.
