Answer to Question #227807 in Economics of Enterprise for Teee

Question

Suppose the expected real interest rate in South Africa is 3 percent per year while that of United States is 1 percent per year. What do you expect to happen to the real ZAR/USD exchange rate over the next year?

Answer 1

The longer the loan or bond, the more uncertainty about the future and higher rates are typically how that greater uncertainty is expressed. These variations are caused by market forces acting on the various components of interest rates.

Higher interest rates tend to entice foreign investment, raising demand for and the value of the local currency. On the other hand, lower interest rates are unappealing to foreign investors and reduce the currency's relative worth.