NTD appreciation impact and exchange rate fluctuations: 9 key factors you must understand

Want to make money in the foreign exchange market but don’t understand why currencies rise and fall? It’s like fighting a war without knowing the enemy’s situation. Behind exchange rate fluctuations, there are actually traceable patterns. Today, we’ll break down these hidden rules one by one.

The 9 Major Drivers of Exchange Rates: A Complete Breakdown from Short-Term to Long-Term

The forex market may seem complex, but the factors influencing currency prices are actually just these 9. Based on the time dimension, short-term factors are driven by interest rates and market sentiment; medium-term factors include political risk, inflation, debt, employment, and capital markets; long-term factors are dominated by trade conditions and fiscal policies.

Short-term factors: Interest rates and market sentiment are the most direct

Interest rate changes are the “magic wand” of central banks

When the central bank raises its hand, interest rates go up. Raising rates sounds simple, but it can instantly change investors’ decisions. An increase in interest rates means holding money in that country can earn more interest, attracting capital inflows, which sharply increases demand for that currency, causing the exchange rate to strengthen. The Reserve Bank of India has used this trick—raising interest rates to prevent the rupee from falling, with immediate effects.

Market sentiment: an invisible but tangible force

Market sentiment is the hardest factor to quantify but often the most destructive. When investors generally expect a currency to appreciate, others follow suit, creating a herd effect that pushes the exchange rate higher and higher. During 2005-06, when the US housing market had low interest rates, everyone was optimistic about rising home prices, which also drove the dollar higher.

Medium-term factors: Economic fundamentals determine

Political stability determines confidence

No one wants to invest in a country with unstable politics. A stable government can implement favorable policies, leading to economic growth, and providing room for currency appreciation. During the Brexit referendum in 2016, the pound plummeted against the dollar because political uncertainty shattered investor confidence. Similarly, when Taiwan’s political environment is stable and policies are clear, foreign capital is willing to hold Taiwanese dollars.

Inflation rate: the invisible exchange rate killer

Countries with high inflation see their currencies lose purchasing power. Investors are savvy—they prefer to buy currencies of countries with low inflation, dragging down the exchange rate of high-inflation countries. Zimbabwe’s example is the most extreme—when inflation soared, the currency depreciated rapidly, and almost no one dared to hold it.

Employment data reflect economic temperature

High unemployment indicates an economic slowdown; people have less money to spend, companies lack motivation to expand, and currency struggles to appreciate. When the US non-farm payrolls report shows optimistic data, the dollar index tends to rise because employment figures are a thermometer of economic health.

Government debt is a confidence cup

Imagine borrowing money when the other party already owes a huge debt—would you dare to lend? The same applies to countries. The higher the government debt, the less foreign capital is willing to enter, and the exchange rate tends to decline. One reason the Indian rupee weakened is high government debt that hasn’t improved with rising oil prices.

Capital markets reveal economic signals

You can predict exchange rates by watching the stock market. A long-term decline in stocks indicates collapsing investor confidence and economic concerns, leading to currency sell-offs; rising stocks reflect economic improvement, and currency appreciation is imminent. Since 2005, China’s capital markets have been rising steadily, and the USD/CNY has followed an upward trend, confirming each other.

Long-term factors: Trade and fiscal policies set the overall direction

Trade conditions determine long-term appreciation potential

Currencies of countries with strong exports tend to appreciate over the long term. Investors prefer to invest in countries with favorable trade terms because it indicates competitiveness and stable foreign exchange income. China’s status as a hot target in the forex market is precisely because its trade conditions have been consistently positive over the years.

Fiscal policy is the ultimate stabilizer

A country’s currency and fiscal policies tell you how friendly it is to investors. If the government introduces policies to attract foreign investment—such as tax incentives, free trade zones, industry support—foreign capital will flock in, increasing demand for the domestic currency, making long-term appreciation a certainty.

Practical Application: How to Use These 9 Factors to Predict Exchange Rates

Once you understand these 9 major factors, you have a compass for forecasting exchange rates. In the short term, focus on interest rates and sentiment fluctuations; in the medium term, look at economic data—inflation, employment, debt, stock markets; in the long term, pay attention to trade and policy trends. The appreciation of the Taiwanese dollar is influenced by the combined effect of these factors: when Taiwan’s political stability, economic data, and capital markets improve, the Taiwanese dollar will naturally appreciate.

Forex trading ultimately is about betting on which country’s currency will become more valuable. Master these 9 factors, and you will grasp the market’s pulse.