INTEREST RATES AND CURRENCY VALUES
Let’s briefly revisit a key concept. You live in a small town. Right in the middle of it are two banks, directly across the street from each other. Both are exactly the same distance from your home, offer the exact same services and both have attentive staff.
One is willing to pay you 3.5 percent interest on your money in deposit at the bank. The other is willing to pay you 7 percent interest on money you deposit with it. Which would you prefer: more money or less?
Money flows around the globe just that way. Investment flows away from low interest countries and toward high interest countries because the higher interest yields provide better returns for the money. Central banks, hedge fund managers, corporate financial officers and forex traders all want the same thing: more profit, not less.
But remember, investment flows this way not just because interest rates are high but because the developed economies with high interest rates are likely booming, and developed economies with low interest rates are likely not doing so well.
Economies that are booming are also attracting investors to their stock markets, stuffing corporations with cash to hire their citizens, increase spending and making a hot economy even hotter. Investment spurs success. This means money and investment is flowing into that red hot economy from all corners of the world.
Take this for example:
Australia has high interest rates because its economy is doing great, largely ...