Which Factor Plays a Role in Establishing the Value of a Country's Currency?

The primary factor that plays a significant role in establishing the value of the currency of some countries is a free-floating currency exchange market. The supply and demand of currency establish the value of a country's currency. When the demand increases for a specific currency, it gains weight and value. Conversely, when in the market, a particular currency decreases, it losses value. In this piece of knowledge, we will discuss which factor plays a role in establishing the value of a country's currency.

12 Factors Establish Value of Country's Currency:

Many factors impact the currency of a country. In addition, to establishing the country's currency here, we mention few significant factors like trade, import, export, interest rate, exchange rate, inflation, economic condition, recession, tourism, volatility, political stability, and geopolitical situation and position of country.

Exchange Rate:

Foreign exchange rates are essential to measuring the value of a country's currency. That is because stability makes the currency more substantial than other currencies. Therefore, a great way to assess the strength of an economy for business expansion is to observe and maintain the currency's stability. For that reason, the exchange rate markets closely watch.

Interest rate:

Interest, inflation, and exchange rates are interconnected. For instance, an increase in interest rates causes a country's currency to appreciate, as lenders provide higher rates, thereby attracting more foreign capital. That plays a role in establishing the value of a country's currency and, hereafter, the exchange rate. On the other hand, cutting interest rates leads to currency depreciation: monetary policy and economic performance.


Inflation rates impact the value of a country's currency. The low inflation rate exhibits a rising currency value. As a result, seemingly purchase power increases the value against other country's currencies. Conversely, countries with higher inflation face depreciation in the value of a currency compared to the trading partner, accompanied by an interest rate. Government debt plays a vital part in inflation. A country with government debt is less to acquire foreign capital, leading toward inflation.


But ups and downs in the currency exchange rate influence the value of the currency. And more, it makes them 'volatile'. Exchange rate Volatility of exchange rate refers to the tendency of foreign currency to appreciate or depreciate in value and ultimately affect a trade's profitability overseas.


An economically solid country's performance and sound monetary policy attract investors who are more inclined to seek. Moreover, due to more business opportunities, people expect an increase in the growth of a country's GDP, which indirectly increases the value and demand of the country's currency. Conversely, a weak economy decreases the value and demand of money.


In the global economic states at the time of writing, it's evident that we're in a global slowdown, and fear of a recession looms. A significant cause of depreciation is a recession in the exchange rate. When interest rates fall impacts interest rates directly.

Foreign investment is another recession factor that impacts the country's currency value that decreases the demand. On the other hand, when inflation falls due to a recession, the country becomes competitive. Therefore, the value and demand of the currency rise.


When someone travels to another country, they need to transfer or convert their money to that country's currency when the local currency appreciates in contrast to the foreign currency. Therefore, reducing a currency shows that foreigners are more inclined to visit the country and spend more than its actual value.

Visitor Weight:

Visitor-weighted exchange rate is another factor that measures a currency market of destination with initial visitor market. Influentially peoples with multiple ranges of visitor markets tend to be resilient versus the particular exchange rate margin than a specific market of the visitor.

Political Stability:

The political state of a country influences the establishment of the currency, pairs with economic achievement. Political stability weakens or strengthens the domestic currency. A Stable political condition attracts foreign investors, leading to the appreciation of the demand and value of its local currency. Foreign capital provides the opportunity to strengthen the domestic currency too.


The geopolitical risk may insecure foreign investors to invest. The sudden change in geopolitical stability may impact the policy of the business and country. Strengthening the economy and secure geopolitical position provides security to the investors who are likely to invest in some country's currency. On the other hand, an insecure atmosphere leads investors to get their investment back. That causes a fall in the value of some country's currency.

Import Export:

A country's BOP (balance of payments) compiles the global business and commercial transactions. These transactions and deals made by individuals, companies, and government bodies play a role in establishing the country's currency. Transactions are consist of imports and exports of services, goods, and capital. BOP of a country includes the comparative ratio of import prices to export prices. However, prices of export are more significant than import it improves the terms of trade.

Geological Position:

The geological position of the country also impacts the economy of the country. The rise and fall in the economy of a country directly influence the position of the domestic currency. For instance, landlock country depends on their neighbors to make a trade, import, and export. In that case, the economy depends on the relation between the two countries. On the other hand, coastal areas provide more rooms to trade in the world independently. So the geological position plays a role in the establishment of the country's currency.

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