Impact of interest rates on exchange rates

Change of interest rates may lead to ambiguous reaction of traders and have some consequences for a national currency. On the one hand, interest rates change should be in direct proportion to the change of exchange rates; on the other hand, every rule has an exception.

Let’s examine the information in details.

It is beneficial for investors to put money in a country at high rates of return, making demand for national currency grow and currency rates rise. However, such system does not always work.

Firstly, it is expensive for entrepreneurs to take out a loan, so they are forced to set higher prices for their goods. Undoubtedly, national currency devalues.

Secondly, during the financial crisis most investors are afraid of investing as unjustified risk may lead to considerable loss. So investors prefer either to wait till it is over or to buy currencies with the lowest interest rates. It inevitably leads to drop in price of the national currencies with high interest rates.

Thus, any changes on the foreign exchange market as well as the change of interest rates have direct and indirect influence on the exchange rate. In order to interpret the economic events correctly, it is necessary to be well-informed about major events, read articles, look through the specialized forums, and analyze the situation on the foreign exchange market.