Foreign exchange rates fluctuate due to a wide array of variables. The most influential variables, however, are interest rates and safety. Capital flows to and from various banks based solely on these two variables.
Let's say that country XYZ's interest rates are a dismal four percent. Alternatively, country ABC's interest rates are a whopping 15 percent. You would have to agree that you would rather have your money invested in ABC earning 15 percent. What if country ABC was actually a war torn country, and country XYZ was the United States? In reality, more investors choose to invest in safer economies, like the United States.Investors choose the United States for their investments primarily because of safety. The United States has never defaulted on its debt and is the strongest economy in the world. The above example is a little more difficult, however, if we were to substitute a stable country, e.g. Switzerland for Iraq.The relationship between interest rates and safety is severe. You have to ask yourself, is it worth an extra two percent to invest over in Switzerland? For many investors, the answer is no. The exception, however, is if the United States is fighting a war. In this case, a lot of foreign capital earmarked for safety will be pulled from the United States in favor of a country like Switzerland. Traditionally, Switzerland's franc has been the world's second favorite currency.
