Currency (Part-I)

Exchange Rate

• Price of one country’s currency in terms of another’s

• Example: 1 USD = 83 INR

• If your currency buys less of another currency → it has weakened

• If your currency buys more of another currency → it has strengthened

Inflation

• Prices of goods and services rise over time, reducing how much your money can buy.

• Higher this thing is, the more the currency loses the value against itself and often also against the other currencies

• If a chocolate bar costs $1 this year but $2 next year, your dollar has lost half its value

Interest Rates

• The return people earn for saving money or the cost of borrowing it

• The higher this thing is, the more the foreign investors are attracted to invest;

• in order to get better returns

• which increases the demands for that currency and raises its value.

• If one country’s bank offers a “better deal” for saving money, more people want that country’s money. 

Supply and Demand for Currency

• How many people want the currency and how much of the currency is available

• If many people want your currency (to invest, buy exports, or travel), its value rises; if demand falls or supply increases too much, it drops.

• Just like concert tickets: if everyone wants them, prices rise; if no one wants them, prices fall. 

Trade Balance (Exports vs. Imports)

• The difference between what a country sells abroad (exports) and what it buys from abroad (imports).

• A country that exports more than it imports gets paid in its own currency, increasing demand and strengthening it.

• If everyone buys your homemade cookies, they need your currency to pay you, making your currency more valuable. 

Central Bank Actions

• The central bank (like the U.S. Federal Reserve) controls money supply and interest rates.

• Printing more money or lowering interest rates usually weakens the currency; reducing money supply or raising rates strengthens it.

• The central bank is like a faucet — open it too much and water (money) loses pressure (value).

Government Debt

• The total money a government owes to others.

• High debt makes investors worry the government may print more money to repay it, which can weaken the currency

• If someone already owes too much, lenders lose trust and their IOUs become less valuable.

Economic Stability

• How steady and predictable a country’s economy is, with stable growth, jobs, and prices

• A stable economy attracts foreign investors, raising currency value; instability scares them away.

• People prefer to keep their savings in a calm, safe country, not one with earthquakes. 

Political Stability

• Consistency and peace in government and leadership.

• Political uncertainty makes investors pull money out, lowering the currency’s value.

• Like passengers jumping off a shaky boat, fewer people want to stay onboard.

Global Demand for Safe-Haven Currencies

• Some currencies (like the U.S. dollar, Swiss franc, or Japanese yen) are seen as safe during global crises.

• In uncertain times, investors rush to these “safe” currencies, increasing their value even if their own economies slow down.

• When a storm hits, everyone runs to the sturdiest shelter and the safest currency gets crowded.

Speculation

• When investors buy or sell currencies expecting future profits from value changes

• If traders think a currency will rise, they buy more now, which actually pushes it up.

• Like people rushing to buy a stock before it goes up, making it go up even faster.

Economic Growth

• How fast a country’s production (GDP) increases

• Strong growth attracts investors and increases demand for the country’s goods and its currency.

• A booming business attracts more customers; a booming economy attracts more currency buyers.

Money Supply

• The total amount of money circulating in the economy

• When too much money is printed, its value falls; when the supply is controlled, the value stays stable.

• If everyone suddenly got a million dollars, prices would skyrocket because money itself would lose meaning.

Purchasing Power Parity (PPP)

• An idea that currencies should have the same purchasing power

• one dollar should buy the same goods everywhere after adjusting for exchange rates.

• If goods are cheaper in one country, its currency may rise until prices balance out across countries.

• If burgers are cheaper in India than the U.S., people buy burgers there, increasing demand for rupees until prices even out.

Expectations of Future Policy

• People’s beliefs about what the government or central bank will do next.

• Even rumors of interest rate cuts, elections, or inflation can shift currency values before anything actually happens.

• Like stock prices jumping on rumors and how money markets move based on what people think will happen next.