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Inflation and Interest Rates of Nations Affect Currency Rates Currency rates denote the rates of two currencies of two different countries. Hence, it is a kind of material communication between the two countries in the form of money. These are the rates that define the foreign exchange rates as well. Though, currency rates are the reflections of many socio-economic and socio-political decesions of the respective countries, they are also affected by other factors such as inflation and interest rates. For example, if the country has higher rates of inflation, it will have lower currency rates. Now, when the currency has lower value in context of foreign exchange market, it automatically loses its stronghold in the market in comparison to other currencies. This in turn proves to be detrimental to traders or investors and fetches them lower foreign exchange rates. Similarly, if the inflation rates are lower, it is obvious that the currency rates are going to be higher. When currency enjoys higher rates in comparison to other currencies, it is bound to be a leading and the most favoured currency in foreign exchange market. Another most important factor that affects currency rates is interest rates. If the interest rates are higher, that is if the investors or traders are getting higher returns on investment, (higher returns on investment here should read higher foreign exchange rates), that currency will be stronger in the foreign exchange market. In the same way, if the interest rates are lower, it will obviously be not favoured by the investors. Having said this, both inflation rates and interest rates are again dependent upon the national foreign policy, economic policies and external affaris policies. And, often the decisions regarding all these are taken keeping in view the overall global scenario. Therefore, currency rates are in a way great tool to gauge the economic health of any country, they are not above and beyond the policies and decisions that a specific country takes to balance its trade and manage its economy.


Inflation and Interest Rates of Nations Affect Currency Rates