How do interest rates influence currency value?

Higher interest rates can attract foreign capital, which drives demand for a currency, leading to its appreciation. When a country's interest rates are elevated compared to other nations, it generally presents a more appealing environment for investors seeking higher returns on investments denominated in that currency. As a result, investors from abroad will convert their capital into the local currency to invest, increasing its demand.

This influx of capital can significantly boost the currency's value against others in the foreign exchange market, as the higher returns pull more investors in. This relationship between interest rates and capital flows is a key aspect of international finance and affects exchange rates globally.

In contrast, lower interest rates tend to diminish the appeal of a currency for investors, which may lead to its depreciation due to reduced demand. Therefore, while interest rate changes are not the only factor influencing currency values, higher rates typically foster a stronger currency by attracting investment.