ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A country’s currency will rise in value when interest rates are high because higher rates will attract more foreign capital. This will lead to an increase in exchange rates and a strong currency. As a general rule, the higher the interest rates, the more foreign investment a country is likely to attract.

Detailed explanation-2: -A rise in domestic interest rates will attract foreign capital inflows and thereby bring on an appreciation of domestic currency, i.e., the exchange rate and the interest rate differential move in the same direction.

Detailed explanation-3: -In words, if the domestic interest rate is higher than the foreign interest rate, the forward exchange rate (future dollar) must be higher than the spot exchange rate (today’s dollar), and vice versa. This relationship should always hold among high-quality, low-risk financial instruments under capital mobility.

Detailed explanation-4: -Higher interest rates can increase a currency’s value. They can attract more overseas investment, which means more money coming into a country and higher demand for the currency.