Question

Explain why an increase in U.S. interest rates would cause the currencies of some emerging economy countries to depreciate.

Answer 1

An increase in in United State interest rate will be directly proportional to an increase in in the prices of dollars.

the appreciation of domestic currency and appreciation of the interest rates are directly related to each other as the interest rates are increased by the central banks, the domestic currency also increases and appreciate against other currency because it grow stronger, and when interest rate cut happens, the domestic currency depreciates.

So increase in interest rate in America would lead to an appreciation in prices of dollars and when dollar will appreciate, the emerging market currencies are bound to depreciate.the value of emerging market currencies and dollars are highly inverse because one spikes the other ones declines.