Factors Affecting Exchange Rates

Originally published in August 2019’s issue of Foreign Exchange Consensus Forecasts

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In this special survey, we asked our FX panellists and other economists to rank the current importance of a range of different factors in determining exchange rate movements (against the US dollar, unless otherwise noted). Scores were assigned to each of the factors on a scale of 0 (no influence) to 10 (very strong influence). The consensus results are the averages of individual panellists’ scores for each factor. Given that different currencies are influenced by a wide range of factors, we have limited the variables considered to a common list of six factors which we asked our panels to assess for every currency. In addition, we asked panellists to suggest, and rank, other factors which they felt to be of particular importance.
Exchange rates are clearly influenced by a wide range of different factors, and the importance of each varies both from country to country and, for any given currency, over time. The special survey results are an attempt to compare and rank the differing degrees of sensitivity with which different currencies respond to these various influences. In addition, as these influences are frequently pushing in different directions, it should also help to determine which factors are likely to dominate. The four graphs on the right and below suggest the direct relationship between currency values and often-cited explanatory factors for the UK pound, the Australian dollar, the Chilean peso and the Norwegian krone.


While we asked our FX panellists and other economists to assign scores to six traditional factors as independent variables, it is clear that they are interlinked to a large degree. Increases in public, corporate and household debt may have received less of a focus amid the battle against a global slowdown, but currencies remain vulnerable to shifts in liquidity conditions and global politics. Rate differentials (and signals regarding the extent to which monetary policy normalisation may now be postponed, or possibly extended) are seen as important FX influences. The US rate cut on July 31 has provided the opportunity for countries in the emerging world to also trim monetary policy, after they had previously refrained from doing so in order to avoid instability in their currencies.


Worries about the global economic outlook intensified last week, after a depreciation in the Chinese renminbi saw the US Treasury label China a ‘currency manipulator’. The risk of an extended trade dispute between these two major countries, which has broad political and economic ramifications, is a key factor affecting the outlook for the renminbi. Relative growth (i.e. domestic resilience to the global slowdown) is ranked highly as a FX determinant for most export-reliant countries, including the Australian dollar and South Korean won. The Japanese yen, though, surged last week, as investors piled into safe haven assets to guard themselves against financial disruptions and unpredictable eco-political outcomes.


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