Question

How are interest rates linked to currency fluctuations

Answer 1

Interest rates is one of the factors that can be studied to check whether the nations' currency value increases or decreases.

All other factors held equal, a high interest rate increases the value of the country's local currency. This is because high interest rate attracts foreign investors to invest in said country. Foreign investor's monetary investments are usually converted into the country's local currency. Thus, increasing the demand for and value of the local currency.

Low interest rates detracts foreign investors from investing in the country. It also decreases the value of the local currency.

Other factors that effect the value of a country's currency are its rate of inflation, its economic and political stability, and its balance of trade between exports and imports.

Answer 2

Higher interest rates mean that if you invest money in a given currency, you will get a bigger return of this money. So higher interest rates attract people to this currency, especially to place their savings in this currency.

This will mean that people will buy this currency: the demand for it will increase, and with an increased demand, the value of the currency will increase.


So higher interest rates are a force that will lead to an increase of the value of this currency. Together with other forces that will lead to a decrease of this value, they will lead to a fluctuation in the exchange rate.