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We are always hearing about currency exchange rates yet most of us are not very clear on what determines the currency exchange rates and how it all works. The currency exchange rates are based on several factors and these factors keep changing based on the circumstances. Though there are certain fixed factors that are usually to do with interest rates, inflation and trade value.

Inflation and recession have the most direct impact on a country’s ability to purchase goods and services within its own borders or in the global market. If a country’s inflation is high it would mean that the country’s buying capacity is low.  This low buying capacity in turn will make that country’s currency less desirable and since the idea is to increase the worth of investment in a currency this inflation will lead to a depreciation of that country’s currency.

Interest rates are directly related to inflation as high interest rates spell less circulation of money which means lesser purchase power and this means that currency exchange rates for that country will go down.

Trade value is based on the ratio of business and trading that happens between two countries. If one country buys more goods than it sells to the same country then the country that makes the most profit from the sale of good will have its currency exchange rates in a higher value bracket.