# Difference Between Interest rate and Exchange rate

## Interest rates and Exchange rates

The question of interest rate arises when currencies are borrowed or lent; whereas exchange rates are involved when different currencies are being bought or sold.

**Exchange rates** are subject to more frequent fluctuations than interest rates. Interest rate is a factor that affects exchange rates. High interest rates cause speculative capital to move between countries and thus affect exchange rates.

**Interest rate** differentials between two countries is a major factor in determining the forward exchange rates of the two currencies the currency of the higher interest rate country would be at a discount in terms of the lower interest rate country. Similarly, the currency of the lower interest rate country would be at a premium in terms of the higher interest rate country.

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