relationship between federal interest rate and currency?

I don't understand how federal interest rate affects currency. Can you please explain?

here is a line from news article.

The yen has been hurt by market expectations that the Bank of Japan, which has kept interest rates at 0.1 percent, will hold off on raising interest rates for the next year or two in a bid to spur economic growth.

from

http://ca.news.finance.yahoo.com/s/02042010/6/fina...

Thank you.

3 Answers

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  • 1 decade ago
    Favorite Answer

    What you're looking at here is international flows of funds. People invest in a country in order to make a return. Let's say that one country has an interest rate of 0.1% and the average interest rate in the rest of the world is 2%. Investors will take their money out of the country with the lower interest rate and put it in the one with the higher interest rate, in order to make a higher rate of return. The way this is accomplished is by selling the low interest rate currency and buying the high interest rate currency. This means that the currency of the low interest rate country will fall in value as people sell it.

    Hope this helps!

  • trimpe
    Lv 4
    4 years ago

    Economics is great because many fashions are hostile to rapidly ahead experience. I skipped those chapters on change price as they are managed through gamblers now-a-days. a million. a lot less expenses of interest make people launch money from banks and advance money flow in markets so inflation will advance because for similar software and similar sturdy ... one is waiting to pay extra. it is in concurrence with upward push in prices with ( disposable) earnings levels, call for held consistent. larger expenses of interest do the opposite. 2. larger expenses of interest in a us of a charm to extra traders and so forex rises. Hardliners say, larger expenses of interest are hostile to boom ability so traders concern a lot less returns and are pushed away so forex falls. What those adult adult males ignore is that traders aleways make investments extra in bonds/securities than in equities. 3. Inflation is a kinfolk phenomenon which has a wierd effect.....It makes value of production dearer so products produced might want to be offered at larger expenses to maintain revenue, that in turn reduces export which in turn reduces overseas money inflow and forex falls. as well, an inflated us of a poses larger threat for traders so that they save away and lower back reason forex to fall.

  • 1 decade ago

    in short words fedral interest rate effect currency iN such a way that it cause

    DEVALUATION and REVUALTION IN CURENCY

    ITS A DEEPER CONCEPT BASICALLY

    another inportant point is that uaually not currency but currency rate is disscused with

    federal interest rates.

    Source(s): wikipedia
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