When there are low-interest rates in a country, the value of that currency is considered low, and therefore there is a reduced demand for that currency in the foreign markets. Less demand for the currency in the foreign market leads to depreciation of that currency, leading to a lower exchange rate than other strong currencies.
When the federal government lowers interest rates, the investors sell their domestic assets, and they buy foreign assets, which lowers the value of the dollar in the exchange market.
Interest rates are essential in the determination of the value of a currency because when the interest rate is high, there is a consequential high return from foreign capital due to high exchange rate; also, when there is a low-interest rate, foreign capital yields low return which leads to lower exchange rates.
A high or low exchange rate of a currency is the determinant of the value of the currency. High exchange rates lead to the high value of the currency, and a lower exchange rate leads to a lower value of the currency.
Şen, H., Kaya, A., Kaptan, S., & Cömert, M. (2020). Interest rates, inflation, and exchange rates in fragile EMEs: A fresh look at the long-run interrelationships. The Journal of International Trade & Economic Development, 29(3), 289-318.
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