Factors Affecting the Exchange Rate There are several factors that can influence the exchange rate of a given country, such as a country's interest rate, inflation rate and the money supply. For some reason, non-theoretical or non-economic factors can influence the appreciation or depreciation of the exchange rate against other currencies.1. Inflation RateThe way price and inflation rate can influence the exchange rate can be explained by the theory of purchasing power parity (PPP). In other words, the PPP theory suggests that, from a long-term perspective, domestic inflation can influence the exchange rate. For example, a country with lower inflation shows an increasing currency value, as its purchasing power increases relative to other currencies. Countries with a higher inflation rate usually experience a depreciation of their national currency because their trading partners have a lower inflation rate and a more appreciated currency.2. Current Account Balance (Balance of Payments) The balance of payments, from the perspective of foreign contractors, increases the demand for the exchange rate of the national currency. If there is ...