What factors affect the value of a currency?

Various factors cause the value of a currency to change, whether it increases or decreases, and these factors include:

interest rates

High interest rates usually attract investors to the country, thus increasing the demand for buying the local currency and increasing its price.

Inflation rates

There is an inverse relationship between inflation rates and the value of the currency, as a lower inflation rate implies an increase in the purchasing power of the currency, which investors may find attractive.

Economic performance

If a country's economy has strong growth and productivity, the value of its currency is likely to rise. Conversely, if the economy is in recession, the value of the currency is likely to fall. But the value of GDP alone is not directly reflected in the value of the currency due to the interference of many other factors in determining its exchange rate.

Stability and political performance

Stable countries with transparent legal systems provide greater opportunity for safe investments, attracting investors and enhancing the value of their currency.

The stability of the currency is more important than its strength

Speaking of stability, governments and monetary policy makers often seek to stabilize their currencies rather than make them strong, because a strong currency makes a country's exports more expensive, which hurts that country's trade competitiveness. 

On the other hand, a weak currency makes imports more expensive, which leads to... Domestic inflation increases, so the ideal path is to aim for the middle and avoid destabilizing fluctuations, according to Hamoudi.

Trade balance

The trade balance refers to the difference between the value of a country's exports and imports. If a country's exports increase more than its imports, the trade surplus increases, which positively affects the value of the currency for which demand increases from foreign entities wishing to purchase goods and services exported by the country.

Public debt

Countries with high levels of public debt appear to be less attractive to foreign investors due to higher default risks and higher inflation rates, which negatively affects the value of the currency.

Central bank intervention

Central banks can intervene in the foreign exchange market to try to stabilize or devalue their currency.