Answer to Question #195050 in Finance for Peter Masih

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.