Question

Analyze how interest rates and inflation can influence exchange rates?

Answer 1

How interest rates influence exchange rates ?

Interest rates affect the exchange rate of any currency, higher interest rates, increases the value of a currency as it attracts foreign investment and ultimately the demand for a currency. For example: If the interest rates in Uk is high, it will be more attractive to deposit money in the UK. Hence, the pound will appreciate.

How inflation influence exchange rates ?

if inflation is low, the Uk products will be in increased demand as the UK exports will become more competitive. Therefore, the low inflation countries will tend to see higher demand and a currency appreciation.