First, we will look at what exactly does currency mean? Currency is a medium of exchange for goods and services. In short, it is money, in the form of paper and coins, usually issued by a government and generally accepted at its face value as a method of payment. Currency is the primary medium of exchange in the modern world, having long ago replaced bartering as a means of trading goods and services. Currency is also referred to as the money used in a particular country while currency value differs from country to country.

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Several key factors cause currency values to change, and these include Gross Domestic Product (GDP), inflation, interest rates and the balance of payment and trade. The easiest way to watch a country’s economic standing is to pay attention to the gross domestic product (GDP). The GDP measures a country’s economy since it calculates the total market value of all goods and services. When the GDP of a country increases, the currency value of the country will rise as well. A strong GDP reading is a growth of 3 per cent or more in many cases, while growth close to zero per cent or a negative reading shows that the economy could be headed for a recession. A typical definition of a recession is two consecutive quarters of negative GDP growth. In an economy like the United States, which is driven by consumer spending, expanding growth that produces more jobs and better wages will allow workers to feel wealthier and help to further stimulate the economy through domestic consumption. More growth can bring higher inflation rates and expectations for interest rate increases. Foreign investment and demand from companies abroad can also play an important factor in boosting the local currency of a strong economy.

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Inflation measures the rate where the general level of prices for goods and services increases while the purchasing power is decreasing. Countries with low inflation rates will have a higher currency since there is an increase in purchasing power, but high inflation will decrease the value of the currency. During the last half of the 20th century, the countries with low inflation included Japan, Germany, and Switzerland, while the U.S. and Canada achieved low inflation only later. Those countries with higher inflation typically see depreciation in their currency compared to the currencies of their trading partners. High inflation is also usually accompanied by higher interest rates. Interest rates, inflation, and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others, or if additional factors serve to drive the currency down. The opposite relationship exists for decreasing interest rates – that is, lower interest rates tend to decrease exchange rates. 

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The balance of payment includes all financial transactions within a country and the balance of trade describes the difference between a country’s imports and exports. A surplus in the balance of payment would increase the national currency while depreciation in the balance of payment would decrease it. If the price of a country's exports rises by a greater rate than that of its imports, its terms of trade have favorably improved. Increasing or improvement, in the terms of trade shows greater demand for the country's exports. This, in turn, results in rising revenues from exports, which provides increased demand for the country's currency (and an increase in the currency's value). If the price of exports rises by a smaller rate than that of its imports, the currency's value will decrease with its trading partners since there is more outflow of monetary payments to other countries.