An Investigation of macro-economic factors affecting the Kenyan exchange rate insights into macroeconomic drivers and exchange rate fluctuations in Kenya

Abstract

The exchange rate, defined as the relative value of one currency against another, serves as a cornerstone in gauging a nation's economic health and stability. For Kenya, the exchange rate between the Kenyan Shilling (KES) and major global currencies, such as the US Dollar (USD), Euro (EUR), Ugandan Shilling (UGX), and British Pound Sterling (GBP), holds particular significance due to its far-reaching implications for trade, investment, and macroeconomic policy. Among these, the KES/USD pairing has historically commanded the most attention, reflecting the US dollar's dominance in international trade and finance. However, as Kenya's economic ties diversify, understanding exchange rate dynamics across a broader spectrum of currencies becomes crucial. As a small open economy, Kenya's exchange rate fluctuations are shaped by a dynamic interplay of domestic and international macroeconomic forces. Factors such as inflation differentials, interest rate disparities, trade balances, remittance flows, and external shocks play pivotal roles in influencing currency values.