Economics Exchange Rates Questions
Currency appreciation refers to an increase in the value of a country's currency relative to other currencies in the foreign exchange market. It means that one unit of the currency can buy more units of another currency.
Interest rates, on the other hand, refer to the cost of borrowing or the return on investment. They are determined by central banks and influence the supply and demand for a country's currency.
The concept of currency appreciation and interest rates is interconnected. When a country's interest rates are higher compared to other countries, it attracts foreign investors seeking higher returns. This increased demand for the country's currency leads to its appreciation. Conversely, when a country's interest rates are lower, it may discourage foreign investors, resulting in a depreciation of the currency.
Therefore, higher interest rates generally lead to currency appreciation, while lower interest rates tend to cause currency depreciation.