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I would like to ask a silly question... I use individuals who currency commerce and I try to browse the fundamental announcements and I keep getting mixed information on interest rates. Do interest rate increases strengthen or weaken a country's currency?
Thank You for the clarifiion. It does help.
Anytime. .:
In general terms this might be accurate, but it might depend on the reason behind the increase. If inflation is a concern, hiked rates might just be a sign that the central bank also has this concern. This is a problem with the major industrial nations.:
Importantly, however, interest rates are a relative thing. If the US and UK both increase rates by precisely the same amount, by way of instance, that basically ifies everything.
Eventually, however, as indied, finally increased rates leads to economic stress, which is not positive for a currency (unless, of course, other nations do worse).
The market moves in reaction to news. Economic news drives the market -- because economic news ultimately drives interest rates.
Interest rates are the supreme gods of exchange rates. Currency rates are set based on expectations regarding how much currency is going to be worth against another currency over the long run. That is much more significant than I can possibly convey -- interest rates are the ultimate driver, over the long run, of currency rates. Just take a look, by way of instance, of a chart of this CAD/JPY over the last 12 weeks, or the GBP/JPY. Japan's interest rate was 0% while the CAD and GBP had rising or steady high interest rates.
What happens in cases like this is that investments soar to CAD-backed bonds to obtain the higher interest rate. This generates CAD buying. Not only that, but hedge funds load up on CAD and sell JPY for long term carry trades. That is enormous trading for them -- and when you saw that the CADJPY take a massive dip in December, it had been because hedge funds were dumping their carry trades to close out yearlong profits. They were also worried that the Bank of Japan is going to start raising interest rates (slow and stable, Greenspan design ) next year.
So news in the brief term is powerful because traders price in what they think will now occur with interest rates based on that news.
Rob
Your question is not silly jimsasya. To answer, it would depend on what view you view it. From Forex trading stand stage, hiked interest rate add strength to this currency. The higher the interest rate the more folks wish to save with banks, the less loans and bond investments.:
Significantly, this affect the stock market trades because less people invest in it.
On the contrary, the reverse is true when interest rate is low. Hope this answers your query.
Joyful trading