There are four main factors that affect fluctuations: 1. Balance of payments and balance of payments are the comparison between the total income of a country and the total monetary expenditure paid to other countries.
This occurs if total money income is greater than total expenditure, and vice versa.
The balance of payments can directly affect the change of a country’s exchange rate.
The occurrence of a balance of payments surplus will increase the exchange rate of the country’s currency, on the contrary, the country will fall;
2. Interest rate, as a basic reflection of a country’s borrowing status, plays a decisive role in exchange rate fluctuations.
The level of interest rates has a direct impact on international capital flows.
Countries with high interest rates have capital inflows and countries with low interest rates have capital outflows.
Capital flow will cause the change of supply and demand, thus affecting the fluctuation.
In general, an increase in a country’s interest rate causes that country, and conversely, its currency, to depreciate;
3. Inflation Generally speaking, inflation will lead to a decline in the exchange rate of the domestic currency, and the easing of inflation will lead to an increase in the exchange rate.
Inflation affects the value and purchasing power of local currencies, which will lead to an erosion of the competitiveness of imports and an increase in exports.
It will also have a psychological impact on the market, weakening the credit standing of the local currency in international markets.
4. Political Situation Changes in the national and international political situation will have an impact on the foreign exchange market.
Changes in the political situation generally include political conflicts, military conflicts, elections and regime changes.
These political factors sometimes have a big impact on exchange rates, but usually for a short time.
