After trading forex for so long, the most frequently asked question is: what exactly determines exchange rates? In fact, the factors influencing exchange rates are far more complex than most people think.

I have summarized the 9 most important factors affecting exchange rates, categorized by time cycle. In the short term, interest rates and market sentiment fluctuate most dramatically. In the medium term, political risk, inflation, government debt, employment, and capital market performance will continue to exert pressure. In the long term, trade conditions and fiscal policies are the fundamental drivers.

First, let's talk about interest rates. When central banks adjust interest rates, investors' reactions are the most direct. Raising interest rates means higher interest income, so everyone rushes to buy, causing the currency to appreciate. Remember when the Reserve Bank of India raised interest rates to prevent the rupee from falling—that's the logic.

Inflation is also very critical. Who would want to hold a currency that keeps depreciating? Countries with low inflation naturally have more attractive currencies. Zimbabwe's hyperinflation in the past, where its currency suddenly became worthless paper, is the most extreme example.

Employment data reflect the health of the economy. High unemployment indicates economic stagnation, which tends to lead to currency depreciation. When the U.S. non-farm payroll report improves, the dollar index often rises accordingly; this correlation is very stable.

Government debt should not be overlooked. Imagine you would lend money to someone heavily in debt? The same applies to countries. The higher the debt, the harder it is to attract foreign investment, and the weaker the exchange rate.

The performance of capital markets can reveal economic truths. A long-term rising stock market indicates investor confidence, increasing the likelihood of currency appreciation. Since 2005, China's capital markets have soared, and the appreciation of the yuan against the dollar is a vivid example.

Market sentiment is the hardest to quantify but has the greatest impact. Once someone predicts that the exchange rate will rise, others follow suit and buy in, creating a self-fulfilling prophecy. During the U.S. housing bubble low-interest-rate period, everyone was bullish on the dollar, and the dollar indeed appreciated.

Trade conditions also determine the strength of a currency. Countries with exports exceeding imports have strong currency demand and naturally appreciate. China's trade surplus has kept the yuan in continuous demand.

Finally, monetary and fiscal policies. If the government implements policies to attract foreign investment, capital flows in, increasing demand for the currency, and causing the exchange rate to rise.

These factors interact with each other. In the short term, market sentiment and interest rate fluctuations are the most intense, but in the long run, trade and fiscal policies are the decisive factors. To survive long in the forex market, you need to monitor these 9 variables simultaneously.