How do interest rates affect exchange rates?

Although interest rates can be a major influence on a currency’s value and exchange rates, the final determination of a currency’s exchange rate against other currencies is the result of other interrelated elements.

What is a currency exchange rate?

An exchange rate is the value of a nation's currency in comparison to the value of another nation's currency. These values fluctuate constantly. In practice, most world currencies are compared against a few major benchmark currencies including the U.S. dollar, the British pound, the Japanese yen, and the Chinese yuan.

Why is currency exchange rate important?

Aside from factors such as interest rates and inflation, the currency exchange rate is one of the most important determinants of a country's economic health. A higher-valued currency makes a country's imports less expensive at home and its exports more expensive in foreign markets.