Answer to Question #180887 in Finance for kaju

Question

Describe how the prevailing interest rates in a country affect its exchange rates with the currency of its major trading partner.

Answer 1

If the rates are high, then loans are more expensive, and goods in the markets are also less competitive. Demand for loans is falling, inflation is slowing down and, consequently, the currency is becoming more expensive.

Conversely, if rates are low, then commercial banks and then companies — take out loans at lower interest rates (sometimes negative), which allows you to sell goods cheaper, the Central Bank prints more money and inflation accelerates-the currency becomes cheaper.