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Hi,
Please can you help me with something that I can not quite get my head around. The relationship between interest rates and exchange rates is that higher interest rates means that the exchange rate will depreciate in value. What I don’t understand is why would high interest rates lead to a depreciation to the exchange rate?
Thanks in advance.
Certainly in the very short term is does seem the ‘wrong way round’.
However, maybe the easiest way of thinking about it is that in the long term (and it is future expectation we are thinking about) a country with higher interest rates is likely to also have higher inflation rates, and therefore to keep competitive then the value of that country’s currency will fall.
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