Before we look at factors that affect currency value, it is worth remembering what currency value reflects. So,
the value of a currency reflects:
- The condition of the economy of a particular country
- The economic outlook relating to a particular country
- The overall market sentiment, or, the overall attitude of traders towards that currency
Let’s take them one by one.
Currency value reflects the condition of the economy of a particular country, in that value rises in times of economic stability and growth, and falls in periods of economic instability and weakness.
Currency value reflects the economic outlook relating to a particular country, revealing whether the future looks promising for the economy of a particular country. Is it likely that a country will experience progress and economic growth in the months to come? Or is it more probable that it will sink into stagnation and remain a weak competitor?
And, last but definitely not least, currency value reflects the overall market sentiment, or, the overall attitude of traders towards that currency. Indeed, it is often the case that what drives currency value in any direction is speculation, that is, what traders and market participants anticipate from, or predict for, the future.