For example, if a basket of common household goods costs $100 in Australia, and an equivalent basket costs US$50 in the United States, then AUD$1 should theoretically be worth USD$2. If it's not, you can look at whether it's overvalued or undervalued as a starting point for your own currency forecast.
These interest rate changes affect inflation, consumer behaviour and international investment in a country, and other factors which all come together to change currency prices.
By itself:
- Raising interest rates generally leads to a stronger currency, as it attracts more foreign investment and demand for a country's currency.
- Lowering interest rates generally weakens a currency, as does the opposite, and reduces foreign investment.
- International trade. If a country exports more than it imports, the high demand for their goods is positive for its currency.
- National debt and growth. Lower national debt and more growth bolsters confidence in a country's economic future and attracts more foreign investment.
- Policy changes. Policy changes such as lowering interest rates or borrowing too much money affect a currency's value.
- Other markets. The value of a currency can be affected by other markets. For example, a booming stock market may take money from forex investments.
- Speculation. Speculative currency trading can have a stabilising and destabilising impact on exchange rates.
There are a lot of factors which determine the value of a currency, and in the short run there tends to be a lot of cyclical ups and downs. But no matter which way it's going, it's always worth getting the best rates possible.