Key points:

*The trend of interest rates is often more important than the interest rate decision itself

*High interest rates will help a country attract foreign investment, thereby increasing the demand for money, which in turn will cause the currency to appreciate

Many foreign exchange traders are confused as to which news they should react to when making trading decisions. The author’s suggestion for this is that traders should pay close attention to news that will affect currency interest rates. In this article, the author will explain why changes in interest rates have a decisive impact on the value of currencies.

Every currency has its own interest rate, and the interest rate is like a barometer of the strength of a country’s economy.

As a country’s economy strengthens, consumers will have more disposable income, and prices will rise accordingly. The principle is that the more we earn, the more and better goods and services we will consume, and then the more we will earn. This forms a cycle-because the total amount of goods and services will not change, but there will be more funds in the market to consume these goods. So prices will rise, which is called inflation.

If the inflation rate is too high, our currency will lose a lot of purchasing power. This means that ordinary goods like bread may also rise to jaw-dropping prices one day, such as $100 a slice. Although this may sound like a far-fetched assumption, it is extremely common in many countries with high inflation rates, such as Zimbabwe. In order to stop this danger, the central bank of each country will take measures to raise interest rates to ease inflationary pressures before they get out of control.

High interest rates make loans more expensive, preventing consumers from buying new houses, using credit cards, or acquiring other debts. More expensive funds also hindered the company’s expansion. Because many businesses are conducted through credit, and credit means that interest will be charged.

The result of high interest rates is that economic growth slows down until the central bank starts to lower interest rates. The lowering of interest rates is to encourage economic growth and expansion. For the central bank, the need to maintain a low inflation rate while promoting economic growth is a very delicate balance.

One of the effects of high interest rates is to attract foreign investment. This is consistent with the logic behind other investments, because investors want to seek the highest possible return. And by raising interest rates, those who invest in the country can get more returns. Therefore, as investors invest in places with higher interest rates, the country’s currency demand will increase.

Those countries that provide the highest return on investment through high interest rates, rapid domestic economic growth, and a good environment in the domestic financial market tend to attract the most foreign investment. The reason is simple: if a country’s stock market performs well and interest rates are high, then foreign investors are more likely to send capital to that country. This increases the demand for the country’s currency, which in turn promotes currency appreciation.

As we all know, for investors, it is not only the interest rate itself that is important, but the trend of interest rates is also a key factor in analyzing the demand for a currency. The trend of interest rates is generally speculated based on the central bank’s statements and meeting minutes. This is why investors tend to analyze word by word to determine what possible interest rate moves the central bank will make at the next meeting. Therefore, the direction of interest rates is often more important than the interest rate decision itself.

The high interest rates in the early stages of economic expansion will greatly help the country’s currency growth and appreciation. However, low interest rates often imply a country’s difficult economic situation and also reflect the lower value of the country’s currency.

In early 2009, as the US credit crisis began to ease slowly, the global economy also began to recover. The Federal Reserve once kept the US dollar interest rate at the lowest level in history, but the Reserve Bank of Australia began slowly increasing its benchmark interest rate.

Since this is the initial stage of Australia’s economic expansion, foreign investors who want to invest and start a company in Australia need a lot of Australian dollars. In addition, in anticipation of an increase in demand for Australian dollars, foreign exchange traders have also begun to buy more Australian dollars/USD.

And these traders who bought the AUD/USD enjoyed at least 30 cents of profit and additional “dividends” every day from 2009 to 2011. This means that the total transaction volume for each mini-lot (ie 10,000 currency units) will bring more than 3,000 Australian dollars plus interest.