How a low interest rate affects a currency 10

Good day forex trading koalas.

Welcome to another forex training education guide.

Have you ever wondered what effect a low interest rate potentially has on a currency? With the US Dollar and Japanese Yen at near zeros, this is an important concept to understand.

The various Central Banks have various policies regarding the monetary management of their countries. With this brings about the various interest rates. The interest rate difference between currency A and currency B is known as the interest rate differential.

The interest rate differential is one of the main primary mover of the currency exchange market. Investors, traders, speculators, businesses, etc have various use for this difference in interest rates.All other things being equal, a currency with a lower interest rate usually weakens against a currency with a higher interest rate. The greater the interest rate differential, the more likely the effects are seen.


Looking at the illustration above,

we see that the weaker currency A is sold in exchange for currency B. Applying basic supply and demand economic concepts, currency A is in supply thus weakening in price while currency B is in demand thus increasing in price.

Many basic facts of the global economy encourages this pattern.

  • Most businesses borrow from a country with lower interest rates to expand in other economies
  • Many investors shift their investing dollars to economies with higher yielding potentials
  • Carry trade traders sell currencies with lower interest rates in exchange for currencies with high interest rates to make use of the interest rate differential

Understanding the above sheds light on why interest rate hikes or reductions are often very closely monitored by the markets. The impact it creates is usually far reaching.

Understand more about the foreign currency exchange market. Read more forex training education guide at the Koala Forex Training College.

Trade Safely.


In the meanwhile do check out our forex forum where you can find discussions of popular topics such as the EUR/USD.

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  • Elmar Votri

    Thanks a lot for the articles. The above is a thing I never had undertanding until now. Because of this I,m here often, to learn. Thanks a lot.

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  • Susan Tate

    This looks like another good article Koala…With diagrams aswell…lol…I’ll read it later when I get some time :/

  • Pete

    Now I know why! I was wondering why the fuss.

  • Delian

    The US dollar should tank already with the super low rates.

  • Weenie

    thanks. This is great. My friend who is a broker tells me this often but I was clueless. Now I know .. Btw how do I join the mailing list?

    • Weenie

      Found it. It’s on the right lol. Thanks anyway.

  • GoldmanWinner

    With the US slowly but surely going to have its interest rates upped, I want to be well position for it. Thanks koala for the dynamics explained.

  • Amy

    Good one. Thanks. Subscribed.