There are several factors that can cause foreign exchange rates to change. These factors can be broadly categorized into two main types: macroeconomic factors and market sentiment factors.

1. Macroeconomic Factors: a) Interest Rates: Changes in interest rates can have a significant impact on foreign exchange rates. Higher interest rates tend to attract foreign investors, increasing the demand for the currency and causing its value to appreciate. Conversely, lower interest rates can lead to a decrease in demand for the currency, causing its value to depreciate.

b) Inflation: Inflation is another crucial factor affecting exchange rates. Countries with lower inflation rates tend to have stronger currencies as their purchasing power remains relatively stable. On the other hand, countries with higher inflation rates may experience currency depreciation as their purchasing power decreases.

c) Economic Performance: The overall economic performance of a country can greatly influence its exchange rate. Strong economic growth, low unemployment rates, and stable fiscal policies can attract foreign investors, leading to an increase in demand for the currency and appreciation in its value. Conversely, weak economic performance can result in a decrease in demand for the currency and depreciation.

d) Trade Balance: The balance of trade, which is the difference between a country’s exports and imports, can impact exchange rates. A country with a trade surplus (exports exceed imports) will experience an increase in demand for its currency, leading to appreciation. Conversely, a trade deficit (imports exceed exports) can result in a decrease in demand for the currency and depreciation.

1. Market Sentiment Factors: a) Political Stability: Political stability is crucial for attracting foreign investment. Countries with stable political environments are more likely to have stronger currencies as they provide a sense of security for investors. On the other hand, political instability can lead to a decrease in demand for the currency and depreciation.

b) Market Speculation: Speculators in the foreign exchange market can influence exchange rates through their buying and selling activities. If speculators anticipate a currency’s value to appreciate, they will increase their demand for it, causing its value to rise. Conversely, if speculators expect a currency to depreciate, they will sell it, leading to a decrease in its value.

c) Market Sentiment and Risk Appetite: Market sentiment and risk appetite can also impact exchange rates. During times of economic uncertainty or global financial crises, investors tend to seek safe-haven currencies, such as the US dollar or the Japanese yen, causing their values to appreciate. Conversely, when market sentiment is positive and risk appetite is high, investors may be more willing to invest in riskier assets, leading to a decrease in demand for safe-haven currencies and their depreciation.

It is important to note that these factors do not act in isolation, and their interplay can be complex. Exchange rates are determined by a multitude of factors, and their fluctuations are influenced by a combination of economic fundamentals, market sentiment, and geopolitical events.