Quote:
Originally Posted by Lambada
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Rising interest rates lower the exchange rate. So that would be a mitigating., not supporting factor.
When interest rates rise, foreign capital comes. Foreign capital needs to buy pesos, so there is large supply of dollars/euros/whatever. Large supply of foreign currency (capital inflow) for the same amount of local currency raises the exchange rate of foreign currency to local currency, and lowers (appreciates) the exchange rate of local currency - e.g. 1:35 -> 1:34
When interest rates fall, exchange rates of local currency rise (depreciate).
Example was the U.S. dollar against Euro, where lots of money was moved from the U.S. to outside because U.S. Fed rate was lowered and lowered. The capital outflow resulted in dollar falling against Euro and Pound. The interest rates were lowered to jump start the economy when the recession started, and to easy the wave of bankruptcies.
Now the DR CB is rising the interest rates, which is usually done to stop the exchange rate increase (depreciation) as a mitigating factor (when exchange rate is depreciating too rapidly (negative point) it is a mitigating factor. At Zero point it is a factor affecting appreciation so the exchange rate falls).
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