From my personal notes

High Interest Rates

Currency (Direct Correlation)

  • High Interest Rates = Stronger Currency (Direct Correlation)

  • Low Interest Rates = Weaker Currency


Inflation (Inverse Correlation)

  • High Interest Rates = Lower Inflation (Inverse Correlation)

  • Low Interest Rates = Higher Inflation


Why higher interest rates strengthens a country currency?

  • By attracting foreign investment, which increases demand for that currency and pushes its value up. 

  • Higher rates offer better returns on investments and a country's currency becomes more appealing to investors seeking higher yields on their assets. 

For example, if I'm a Japanese investor with spare cash lying around, I can invest it in Japanese interest rate products and earn basically nothing (since Japanese interest rates are near-zero), or I can convert my Yen into Dollars and invest in US interest rate products, earning me around a 5% annual return.


Negative Interest Rates

Unconventional monetary policy where commercial banks are being charged for holding on to their reserves.

Used to stimulate economic activity and combat deflation by discouraging cash hoarding and encouraging banks to lend more money.

  • Used by Japan to combat deflation

  • Low Interest Rates = Weaker Currency

That’s why Japanese yen has been declining