A currency’s rate of exchange specifies how one currency is valued relative to another. Currency is a commodity, and like all commodities, the primary determinant for its price is the supply and demand for that commodity. As demand increases for a commodity, so does the price. Several factors can affect the supply and demand of a currency, and are generally related to economic, political, and psychological factors. The major economic factors in a country or region where a currency is domiciled include its interest rates, economic growth, and rate of inflation. Countries where interest rates are higher than other comparable countries will likely attract foreign investors. To purchase a foreign security, an investor must exchange their currency for the foreign currency. As investors purchase a country’s currency, the demand for the currency rises, thus increasing its price relative to other currencies. This is also referred to as a "strengthening" currency. A rising rate of inflation in a country means that the price of goods and services, relative to its currency, is increasing. Because investors do not want to hold currency that is losing purchasing power, the demand for currency will decline. The drop in demand creates an increase in supply, thus reducing the price, or "weakening" the currency. The increase in supply of a currency only exacerbates the problem of inflation, because as the supply of money increases, the purchasing power erodes further. The rate at which a country imports relative to the rate at which it exports is a major economic factor tied to exchange rates. A buyer of goods or services in another country must exchange their currency for a seller’s currency, thus decreasing demand for the buyer’s currency and increasing demand for the seller’s currency. When the gap at which a country imports more than it exports increases, referred to as a widening trade deficit, it is not uncommon to see a weakening currency. Political factors that have an effect on currency price fluctuations include a government’s fiscal policies and national stability. A government that operates a fiscal deficit is one that spends in excess of what it brings in from its tax base. While many economic theorists believe a fiscal deficit will spur economic growth in periods of high unemployment, it can also lead to a rising rate of inflation. In addition, nations that appear unstable, either as a result of war, political unrest, or other reasons, will likely experience a weak currency as investors look to invest in other countries with a higher degree of predictability. Psychological factors can also come into play, where an event or rumors may lead investors to buy or sell a currency, such as a nation’s election of a new leader or the threat of a government’s instability or insolvency. It is unlikely a currency’s exchange rate is tied exclusively to only one of the factors mentioned, as many factors are often related to each other. For example, low interest rates can lead to a high rate of growth in a country, which could eventually lead to an increase in inflation, resulting in a weakening currency. Many factors should be considered when analyzing currency rate fluctuations; and not all of them are mentioned above. However, in terms of major drivers of currency supply and demand, most are related to the current economic and political climate, or perhaps investor’s expectations of future economic and political conditions.