**Interest Rate and Exchange Rate**

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.

The exchange rate is subject to more fluctuations than interest rates.

**Interest rate effect**

The interest rate is a factor that affects the exchange rate. High interest rates cause speculative capital move between countries and thus affect exchange rates. Insert 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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