Last updated on October 8th, 2022 at 08:08 pm
How does interest rate affect forex currency pairs? The higher the interest rate of a currency, the more likely it is to strengthen.
A currency that pays a higher interest rate will attract more investors to buy it, causing it to strengthen relative to other currencies.
Examples of interest rates affecting currency pairs
In 2022 the US Dollar strengthened more than 20% against the Japanese Yen because of the high interest rate of the US Dollar and low interest rate of the Japanese Yen.
The US Dollar yielded an interest rate of 1.75% in June 2022, while the Japanese Yen yielded -0.1%.
This difference widened further in September 2022, with the US Dollar’s interest rate increasing to 3.25% while the Japanese Yen continued to yield -0.1%.
Australian Dollar appreciation against Yen in 2003-2007
During 2003-2007, the Australian Dollar strengthened more than 50% against the Japanese Yen because of the large interest rate differentials between both currency pairs.
At its peak, the Australian dollar was paying 7% interest versus the Japanese Yen’s 0.5% interest.
How to trade forex using interest rate information?
Buy currencies with increasing interest rates or high interest rates while selling currencies with low interest rates or decreasing interest rates. A list of current interest rates.