Why do Interest Rates impact currency rates?

17 November 2008 - Mark Maffia (Which Way To Pay)

    



Why do Interest Rates impact currency rates?

Interest rates (and more importantly the markets' perception of future interest rates) have a direct impact on currency exchange rates.  A currency offering a high interest rate (a "high yielding" currency) often attracts buying of that currency, making it strengthen against other currencies.  Currencies offering low interest rates (or where interest rates are falling) often suffer from low demand and weaken as a result.  This has been the case with Sterling over the last month (as of November 2008).

Another important factor to consider is that currencies offering a high interest rate also are likely to have high inflation and a riskier economy.  Like all other investments/assets, higher reward (in yield) is usually accompanied by higher risk.  Therefore when risk aversion rises, investors will sell high yielding/risky assets, which makes high yielding currencies fall in value.

FX_50x50_icons.jpg

Related Links :
Foreign Exchange Merchants

PRODUCT RANGES: CURRENCY EXCHANGE
Foreign Exchange and Currency.
TRADING
Forex, CFDs, Shares and Futures.
INVESTMENTS
ISA, Pensions, Savings Accounts.
LOAN PRODUCTS
View all Loan and Debt Products.
CARD PRODUCTS
All Card Products Compared.
MONEY PRODUCTS
All Money Products Compared.
INSURANCE PRODUCTS
All Insurance Products Compared.

Current bank account complaints increase as the packages offered fail to deliver to customers
07 October 2014 - Which Way To Pay
Many Bank accounts are continuing to apply unwanted fees for 'packages' that aren't being delivered
Read More >>
Separation and what it means for your finances
25 June 2014 - Lauren Middleton
Separating, or filing for divorce or dissolution of your civil partnership is a highly stressful time,with many emotions running high however it is in your best interest to sort out your finances straight away.
Read More >>
Credit card fraud and what you can do to prevent it.
12 May 2014 - Lauren Middleton
If you own a credit card then you are assessable to credit card fraud. Although you may think your being cautious it’s easier than you think to be fooled by sophisticated scams.
Read More >>