What is the Effect of Interest Rates on Currency Exchange Rates?

[Suba]

Interest rates are determined by each country's central bank. Interest rates not only affect investment instruments like crypto, stocks, bonds, etc., but also significantly impact the exchange rates of other currencies. Therefore, every investor and trader is always on the lookout for interest rate news, especially changes in interest rates from major countries like the United States, Canada, the Euro, and so on. For example:

In the EUR/AUD pair, the current interest rate (according to Google) on the Euro is 2.40%, while on the AUD it is 3.60%. If the European Central Bank (ECB) raises interest rates by
0.25%, the EUR interest rate will fall to 2.65%. Assuming the AUD interest rate remains unchanged, the demand for AUD will also remain stable. Many investors will withdraw their investments, such as gold, stocks, and crypto, and move them to Euro-denominated investments. Investors will profit from this interest rate change. Even though the EUR interest rate is smaller than the AUD interest rate, the EUR value not only rises against the AUD but also rises against other currencies and vice versa.

 

[gwolf666]

That’s a very good explanation of how interest rates influence not just investment choices but also the overall strength of currencies in the global market. Interest rate decisions from central banks are some of the most closely watched events for traders and investors because they can shift capital flows almost instantly. When a central bank raises interest rates, it generally signals higher returns for assets denominated in that currency, which naturally attracts foreign investors. This demand increases the value of that currency, even if its rate is still lower compared to others, as in your example with the Euro and the Australian Dollar.
It’s also important to consider the expectations leading up to these decisions. Sometimes, the actual impact is less about the rate change itself and more about whether the market anticipated it. If the European Central Bank raises rates by 0.25% and traders were already expecting that move, the reaction might be muted. However, if the change is larger than expected, it can trigger strong market volatility.