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Interest rates
From The Free Forex Encyclopedia
Definition
A rate which a borrower pays for holding a lender’s money.
Importance
Differences in interest rates affect the relative worth of currencies relative to another.
Market Impact
Interest rates dictate flows of investment. An increase in interest rates in a particular country encourages investment in that country since it offers higher returns. This causes the demand for their currency to rise. As demand for that currency rises, it becomes scarcer and thus more valuable. When central banks change interest rates, the value of their currency relative to other currencies also changes. Countries that undergo interest rate cuts tend to experience a depreciation of their currency.
Nominal versus Real Interest Rates
The nominal interest rate is the rate of return without any adjustments for inflation. The real interest rate is the nominal rate minus the effect of inflation.
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