Factors That Affect Currency Value
Factors That Affect Currency Value. When pennies were first minted using copper, the value of the penny was much higher than the value of the metal it was made from. By 1983, the United States began minting pennies made from zinc instead of copper, because the copper used to make a penny was worth more than the coin itself. In 2010, a single copper penny is worth approximately two-and-a-half cents. Certainly, this is because copper has become more valuable over time, but it is also an effect of money becoming less valuable. There are a number of reasons why currency changes in value.
Trade and Investment Balance
Economic analysts cite trade and investment balance as the largest influence on a currency's value. Trade balance is the difference between how much a country imports and exports; investment balance is the difference between how much a country invests in other countries and how much it is invested in by them.
Economy and Economic Theory
Whether or not an economy is in a growth or recession period is another large factor that affects the value of a currency. During periods of growth a currency raises in value, and in recessions the opposite is true. How much demand there is for a particular currency is also important, with a higher demand raising the value. And increase in money supply can bring the value down, as there is more supply than there is demand.
Politics plays an important part in a currency's worth, including budget deficits, geopolitical events, consumer tax cuts and entitlement programs. Countries, like corporations, keep a close watch on each other and how business is done. If a government has policies that weaken its economy or its control over the market, other governments will take notice. A government's national debt, budget deficit and debt default rate affects the nation's worldwide credit rating, and its currency is valued accordingly.
War brings about many changes, and affecting a nation's currency is one of them. War can stifle or stimulate an economy, affect policy and alter a government's perception of another nation.
A nation's manufacturing and service industries are important aspects of how a nation's currency is valued. Strong growth in manufacturing sectors will strengthen investors' resolve, while a manufacturing slowdown will make them wary. Also, manufacturing growth and shrinkage is a major employment indicator, and high employment rates equal strong currency because a government is guaranteed more taxes to run efficiently.
Weather, too, can cause a currency's value to rise and fall. Weather that is too hot or cold can play havoc on crops, and unseasonal weather causes energy consumption to skyrocket. A nation's food and energy reserves are a major part of its economy, and large changes in those reserves alter the balance of trade. Finally, natural disasters create a strain on local economies, causing their currency to struggle as they spend furiously on rebuilding and relief programs.