A rise in interest rates is expected to lead to an appreciation of the currency, and a drop in interest rates is expected to lead to a depreciation.

Question

Quizplus · Accepted Answer

This is the general relationship between interest rates and currency exchange rates. When interest rates increase, it becomes more attractive for foreign investors to hold that currency, increasing demand and thus the exchange rate. Conversely, a decrease in interest rates makes the currency less attractive and can lower demand, leading to a depreciation. However, other economic factors can also impact exchange rates.

A Rise in Interest Rates Is Expected to Lead to an Appreciation