-    The differences in inflation rates between two or more countries. If everything else is equal, countries with higher inflation often see their currencies depreciate. If two countries have similar inflation rates that increase by the same amount, there may be little or no exchange rate movement between the two currencies.

-    Differences in real interest rates (nominal interest rate less inflation). The country with the higher real rate may attract more investors, causing its currency to rise in value.

-    Trade balances. A country which exports more often has a stronger currency than one which imports more.

-    Deficit spending. A country with more public debt as a percentage of its economy, or increasing levels of public debt, may have a currency which gets weaker over time. The U.S. government, in an attempt to stabilize the economy, has greatly increased the federal deficit, which could increase future inflation and reduce the value of the U.S. dollar.

-    Politics and the perceived safety of a nation’s currency. During 2008, investors around the globe sold risky assets and bought U.S. Treasuries. This boosted the value of the U.S. dollar relative to other currencies, even though the financial crisis started in the United States.

As with any economic factor, there are feedback mechanisms which, over the longer run, tend to restore equilibrium. For example, if a country has a currency which depreciates, its exports may become cheaper in terms of foreign currencies. Over time that may lead to higher exports and a stronger currency. So it is risky to greatly extrapolate any trend far into the future.

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