Regarding Fundamental news. If a Bank raises interest rates does this tend to strengthen the countries currency (or not?). I’m assuming a raise in Interest rates is good for savers in the country but more expensive for people and businesses to borrow credit. If that is true how does this strengthen the currency…or if I have this the wrong way round…how would this weaken the currency?
In addition to this if inflation rises what impact does this tend to have on the currency?
Regarding Fundamental news. If a Bank raises interest rates does this tend to strengthen the countries currency (or not?). I’m assuming a raise in Interest rates is good for savers in the country but more expensive for people and businesses to borrow credit. If that is true how does this strengthen the currency…or if I have this the wrong way round…how would this weaken the currency?
In addition to this if inflation rises what impact does this tend to have on the currency?
Thank you all.[/QUOTE]
Interest rate being raised boosts a currencies value as demand for the currency increases from investors as they are attracted to the higher yield.
A high inflation generally will cause the central bank to increase interest rates… Which will in turn boost the currency.
Rising rates will tend to benefit currencies with relatively low and stable inflation rates. The same cannot be said for less developed currencies. If a central bank raise rates there because of inflation risk, if the market will oftentimes be more worried about the inflation issue.
An interest rate hike is usually good for a currency because it means that
a. The currency would have a higher yield and
b. The central bank thinks that the economy is growing fast enough to warrant a bit of a slowdown (provided that inflation is caused by economic growth).
The impact of high inflation depends on the central bank’s goals. For example, CBs like the BOE, ECB, and the Fed want to keep inflation under control while the BOJ would welcome a faster inflation rate.
For the past few years, there has been a lot of dialogue about how Americans are not saving much money or at least not putting it aside. Even if people were to up the rate of savings, inflation rates have virtually made it an unnecessary exercise.