Exchange Rate Fundamentals — What Moves Currency Values

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Overview

Currency exchange rates move constantly based on interest rates, inflation, trade balances, and market sentiment. Understanding what drives them helps with timing.

The Formula

Strong currency factors: high interest rates, low inflation, trade surplus, political stability

Standard formula used by professionals worldwide

Worked Example

Step-by-step

PKR weakened: inflation differential with USD, current account deficit, political uncertainty

Key Points

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Frequently Asked Questions

What is carry trade?

Borrowing in low-interest currency, investing in high-interest currency. Risky if rates change.

What is a currency crisis?

Rapid devaluation, often triggered by loss of foreign reserve confidence.

How do central banks influence rates?

By raising/lowering interest rates and buying/selling foreign currency reserves.

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