How Interest Rates Work

[Tobi]

When investors hold a certain currency, they get a yield in terms of the interest rate that is applicable on that currency. Therefore if investors were to hold a currency with a 6% yield as opposed to a 3% yield, they would end up profiting more! Therefore, the interest rate yields are also priced into the Forex rates that are quoted in the market. The currency valuations are extremely subjective to interest rate changes. A small change in this rate brings about a big reaction from the market participants.

 

[gwolf666]

Interest rates play a crucial role in the Forex market, as investors earn returns by holding a currency with a higher interest rate. If a currency offers a 6% yield versus a 3% yield, the difference directly impacts profitability. Therefore, changes in interest rates can generate strong market reactions, as they affect demand and currency valuation. A small adjustment in these rates can significantly alter exchange rates.