Opposite effects of raising interest rate, on currency

Trading Discussion News and Economy
1

The central bank of Country A (a stable country with a well-developed economy) raises the interest rate.

In the short term, this country’s currency rises due to demand for the currency by carry-traders.

In the medium to long term, its currency falls back due to the International Fisher Effect (look it up on the internet).

Do I have it right?

2

Unless You leave trade open for months, - does it matter?

3

This is way too black-and-white…
Market dynamics are not capable of being described as simply as you’ve stated…i.e. Country A raises rates, thus demand for the currency increases.

Market participants don’t trade solely on interest rate expectations. If that were the case, it’d be as easy as simply buying and holding a higher yielding currency via a lower, funding currency for years. And, everyone would be millionaires.

4

Just my two pips… Using the Fisher effect to predict long-term price movement after a rate hike may be too theoretical. From my experience, an interest rate hike could still result to longer-term rallies for the local currency, but of course this depends on which counter currency you are trading it against. Aside from that, a central bank hikes rates only when it is very confident that growth will keep up, which means that the economy might continue to show strong data even after a rate hike and spur further expectations of yet another rate hike.

5

Thanks. That was helpful.

6

Glad to help.

7

yeah. this this a macro ecomomics. when rate up it will good for currency. and it can raise than some currency

8

My understanding is that central banks target interest rates through control of the money supply. To raise rates, the money supply is decreased. Decreased supply equals an increase in value (especially absent a change in demand), hence interest rate hikes put upward pressure on a currency’s value.

High interest rates can also restrict growth and are mostly used to prevent inflation and bubbles. So after a rate hike, if growth begins to slow, the market might reevaluate the currency, causing it to begin to decrease in value.

9

Very helpful, thanks.