Interest rates

From Forexpedia

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.