What Moves Exchange Rates?
Why your holiday money buys more one year than the next — and what that means for prices at home.
By Iris Penhaligon | Oct 5, 2026 | 6 min
An exchange rate is simply the price of one currency in terms of another. Like any price, it moves with supply and demand. Trillions of dollars’ worth of currency changes hands every day.
A handful of forces explain most of the big moves.
I Interest rates
Higher interest rates make a currency more attractive to investors seeking returns, increasing demand for it. When a central bank raises rates faster than others, its currency often strengthens.
II Inflation
Over long periods, currencies of countries with high inflation tend to weaken relative to those with low inflation, because each unit buys less.
III Trade and capital flows
- — Countries that export more than they import see steady demand for their currency
- — Foreign investment into a country’s companies, property, or bonds increases demand
- — Commodity prices matter for currencies of big oil, metal, or food exporters
IV Confidence and risk
In times of global stress, investors often move money into currencies seen as safe havens. Political uncertainty, elections, and policy surprises can weaken a currency quickly.
V Why it matters to you
A weaker currency makes imports, foreign holidays, and imported fuel more expensive, which can push up inflation. It also makes exports cheaper abroad, helping exporting businesses. A stronger currency does the opposite.
This is general educational information about economics, not financial, investment, or tax advice. Consult a qualified, licensed professional before making financial decisions.
Further reading
- 1. Supply Chains: Why Disruptions Ripple Through the Economy
- 2. What Do Central Banks Actually Do?
- 3. What Causes Inflation? A Plain-English Guide