Top Economic Factors That Affect Foreign Exchange Market

Daffa Zaky 

Monday, 05 November 2018 09:28 (EST)

Foreign Exchange rate plays a key role to determine the economic health of a country. It offers visibility to the country’s economic future. Therefore, it is always important to carefully observe and analyze the forex market and its changing trends. If you are involved in the forex market and overseas transactions, you cannot ignore the currency exchange rates. Your ignorance will lead to a loss.

The exchange rate determines the value of a particular country’s currency. The rate does not remain constant. It keeps changing. In fact, it fluctuates daily with the changing market condition. Based senior analyst from, There are many economic factors that can affect the forex market. It is essential to understand those factors to avoid any risk and to act smart.

If you make international transactions more frequently, you might be interested to know all those factors that affect the foreign exchange rate. To help you with more information, followings are a few key economic factors that affect the forex exchange market.

Interest Rates

The change in the interest rate can be a contributing factor. It might affect the currency value and the exchange rate. Many economic factors such as interest rates and forex rates are related. If there is an increase in the interest rate, the lenders will expect higher rates. The result is obvious. It will attract more foreign capital. With more foreign capital, there will be a rise in the exchange rates.

Inflation Rates

If there is a change in market inflation, it might affect the currency exchange rates. If your country has a low inflation rate, then the value of your currency will be more. When the inflation is low, the prices of services and goods will witness a slow and gradual increase. When there will be consistently lower inflation rate, then it will increase the currency value. With higher inflation rate, the currency value will be depreciated. It will affect the interest as well.

Government Debt

Government debt is a public liability. It is taken by the government. If your country has a debt, then the possibility of getting more capital is less. It might lead to inflation. The foreign investors will not be inspired to invest in the currency when the inflation is high. As the result, the value of the currency will decrease.

Political Stability & Sound Financial Policy

Political stability plays an essential role. A country’s economic performance can affect the forex market. When there is no stable government, it might affect economic performance. The investors will not find the currency profitable. A stable government will attract foreign investors. It will not only increase the foreign capital, but the investment will also increase the value of the domestic currency. A country with a stable political system and sound financial policy can easily win the trust of the foreign investors. There will be no room for uncertainty. However, political confusion and unstable governments can cause depreciation in the currency value.

Country’s Current Account

A country’s current account is the reflection of the country’s financial status. It shows the earnings on the forex market. It will include all the details such as a number of transactions, debts, and any other information related to the country’s economy. When there is a deficit in the current account, it will discourage the foreign investors to consider the currency of that country. They will not find the currency worth spending. Their decision will be guided by the account information of the country.


Recession affects a country and its economic development. The forex market is not an exception. When there is a recession, the interest rates will fall. It will cause the depreciation of the foreign capital. When there are fewer interest rates and less foreign capital, the value of the currency will start to decrease. As the result, there will be a lower exchange rate.

Market Condition

When some investors feel that the value of the currency of a country is expected to rise, they will start investing in that currency. It will increase the value of the currency due to the increasing demand. More investors will be inspired to invest in that currency to make more profits.

All these economic factors can influence foreign exchange rates. You need to keep a close eye on these economic factors to avoid any potential fall while investing in a currency. A close observation will minimize the risk and will enable you to make more profits from your investment.

The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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