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Fundamental Factors That Affect Currency

There are several factors that go into the valuation of a currency.

There are several factors that go into the valuation of a currency. Some common ones are the domestic economic performance and political stability, which drive global trading flows into, or away from, a currency.

Currencies are considered a "pure play" to trade on the relative performance of one country versus others. The key nexus is interest rates. In a generally stable environment, developments that indicate economic weakening will often drive interest rates lower as central bankers try to stimulate growth. The prospect of lower interest rates will, on balance, drive a currency down in price as investors move funds elsewhere in search of higher yields.

For this reason, economic reports are watched closely and often have immediate and significant impact on foreign exchange rates. Monthly economic statistics, including measurements of GDP, inflation, unemployment, wages and productivity growth, released by governmental sources, universities, and other organizations.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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