Central Banks

The 6 Factors That Influence Exchange Rates

Published

5 years ago

June 7, 2018

Jeff Desjardins

Every day, close to $5 trillion of currency gets exchanged on global markets.

It’s a market that’s running continuously for 24 hours per weekday around the world – and transactions can happen using different mechanisms, such as spot transactions, outright forwards, foreign exchange swaps, currency swaps, or the use of other types of options.

But what fuels changes in this extremely liquid and busy market, and why are the exchange rates between countries constantly in flux?

Key Market Factors

Today’s infographic comes to us from Hiwayfx and it highlights six of the major factors that can impact currency exchange rates.

6 Factors That Influence Exchange Rates

As with many things in macroeconomics, it’s important to note that many of these factors are related and can feed off each other.

For example, a high rate of inflation can lead to central bank intervention, such as raising interest rates and buying or selling domestic currency. This could lead to an increase in government debt, and so on.

What Influences Exchange Rates?

Here are the six factors summed up again:

1. Government Intervention: Central banks can influence rates by buying or selling the domestic currency.

2. Inflation: Countries with consistently high inflation rates tend to have lower currency values. This is because purchasing value decreases relative to other countries.

3. Interest Rates: A rise in interest rates in a country can offer investors a higher rate of return than other countries. As a result, the currency can appreciate relative to other countries.

4. Current Account Deficits: If a country has a current account deficit, it means that it’s spending more than it’s earning in foreign trade. To make up this deficit, countries may borrow capital from other external sources, which in turn will help make the domestic currency depreciate.

5. Government Debt: Countries with high amounts of debt are less attractive to foreign investors due to the chance of default as well as possible high inflation rates. This can decrease the currency’s value.

6. Speculation: Most trades in the forex markets are speculative trades, which means that sentiment and momentum can play big roles in market activity. Even if the fundamentals don’t align, the market for a currency can continue soaring or depreciating if traders and governments perceive it should.

For a related topic, see a map of the countries with the most foreign currency reserves.

Related Topics:USD forex currency exchange rates interest rates money inflation

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United States

Charted: Public Trust in the Federal Reserve

Public trust in the Federal Reserve chair has hit its lowest point in 20 years. Get the details in this infographic.

Published

4 months ago

May 23, 2023

Marcus Lu

The Briefing

Gallup conducts an annual poll to gauge the U.S. public’s trust in the Federal Reserve
After rising during the COVID-19 pandemic, public trust has fallen to a 20-year low

Charted: Public Trust in the Federal Reserve

Each year, Gallup conducts a survey of American adults on various economic topics, including the country’s central bank, the Federal Reserve.

More specifically, respondents are asked how much confidence they have in the current Fed chairman to do or recommend the right thing for the U.S. economy. We’ve visualized these results from 2001 to 2023 to see how confidence levels have changed over time.

Methodology and Results

The data used in this infographic is also listed in the table below. Percentages reflect the share of respondents that have either a “great deal” or “fair amount” of confidence.

Year	Fed chair	% Great deal or Fair amount
2023	Jerome Powell	36%
2022	Jerome Powell	43%
2021	Jerome Powell	55%
2020	Jerome Powell	58%
2019	Jerome Powell	50%
2018	Jerome Powell	45%
2017	Janet Yellen	45%
2016	Janet Yellen	38%
2015	Janet Yellen	42%
2014	Janet Yellen	37%
2013	Ben Bernanke	42%
2012	Ben Bernanke	39%
2011	Ben Bernanke	41%
2010	Ben Bernanke	44%
2009	Ben Bernanke	49%
2008	Ben Bernanke	47%
2007	Ben Bernanke	50%
2006	Ben Bernanke	41%
2005	Alan Greenspan	56%
2004	Alan Greenspan	61%
2003	Alan Greenspan	65%
2002	Alan Greenspan	69%
2001	Alan Greenspan	74%

Data for 2023 collected April 3-25, with this statement put to respondents: “Please tell me how much confidence you have [in the Fed chair] to recommend the right thing for the economy.”

We can see that trust in the Federal Reserve has fluctuated significantly in recent years.

For example, under Alan Greenspan, trust was initially high due to the relative stability of the economy. The burst of the dotcom bubble—which some attribute to Greenspan’s easy credit policies—resulted in a sharp decline.

On the flip side, public confidence spiked during the COVID-19 pandemic. This was likely due to Jerome Powell’s decisive actions to provide support to the U.S. economy throughout the crisis.

Measures implemented by the Fed include bringing interest rates to near zero, quantitative easing (buying government bonds with newly-printed money), and emergency lending programs to businesses.

Confidence Now on the Decline

After peaking at 58%, those with a “great deal” or “fair amount” of trust in the Fed chair have tumbled to 36%, the lowest number in 20 years.

This is likely due to Powell’s hard stance on fighting post-pandemic inflation, which has involved raising interest rates at an incredible speed. While these rate hikes may be necessary, they also have many adverse effects:

Negative impact on the stock market
Increases the burden for those with variable-rate debts
Makes mortgages and home buying less affordable

Higher rates have also prompted many U.S. tech companies to shrink their workforces, and have been a factor in the regional banking crisis, including the collapse of Silicon Valley Bank.

Where does this data come from?

Source: Gallup (2023)

Data Notes: Results are based on telephone interviews conducted April 3-25, 2023, with a random sample of –1,013—adults, ages 18+, living in all 50 U.S. states and the District of Columbia. For results based on this sample of national adults, the margin of sampling error is ±4 percentage points at the 95% confidence level. See source for details.