Interest rate fx relationship

In currency investing, would it be more profitable to invest in a country with high interest rates and high inflation, or low to zero interest rates with low inflation? In other words, is the real interest rate more important than nominal? Other factors being equal, does it always mean that the currency of a country with higher real interest rate will strengthen over time compared to one with a lower real interest rate?

Firstly, just to summarise. Higher real interest rates tend to lead to an appreciation in the currency. This is because high interest rates means saving in that country gives a better return. Therefore investors often move funds to countries with higher interest rates.

However, as well as the nominal interest rate, it is also important to look at the inflation rate. Higher inflation tends to lead to depreciation in the value of a currency. With high inflation, goods become less competitive so demand falls relative to other countries with lower inflation rates.

But, if we exclude other factors, higher inflation tends to depreciate the value because goods are becoming less attractive. This is a simplification to help understand the concept. Facebook RSS Follow economicshelp Basket.

Tejvan Pettinger June 13, interest-rates. Yes, the real interest rate is the most important factor.

Suppose you have Two Countries: However, in this situation, it would be advisable to invest in UK pounds because a lower inflation rate suggests greater stability. This volatility will discourage investors in India. The higher inflation is, the more volatile it tends to be. This is because although there is a lower real interest rate in the UK, there is a greater sense of stability. Other Factors Affecting Exchange Rate If we look at the Pound in recent months, it has been relatively strong compared to the Euro and some other countries.

This is despite a negative real interest rate. Base rates are 0.

Interest Rates and Exchange Rate | Economics Help

Therefore, there has been strong demand for the Pound, despite a negative real interest rate. Therefore, this shows that the real interest rates is only factor out of several that can influence the exchange rate. What Next for the Pound to Euro?

macroeconomics - How interest rate affects currency - Economics Stack Exchange

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How Interest Rates Affect Forex Trading

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