If interest rates in one region are higher than in another, that means that money will get a higher return there than elsewhere. Higher interest rates generally attract demand for the currency. Higher interest rates can be considered a predictive sign that the currency where the rates are rising will strengthen. Recently, the United States experienced a major decline in its interest rates that led to 40-year lows. During this period it was no accident that the value of the U.S. dollar entered a downward trend. However, a rise in interest rates does not always result in a rise in the currency value. When the Federal Reserve increased interest rates in the United States for the first time in 4 years on June 30, 2004, the U.S. dollar did not increase in value. The increase in U.S. rates occurred in a context of global pessimism regarding the U.S. economy and deficit. The result of this pessimism led to further declines in the U.S. dollar despite the rise in rates
Following global interest rates is important to forex trading to gain insight about which countries' economies are performing better. When New Zealand increased its interest rates, the Australian dollar became weaker because money was getting a better return in New Zealand. The recent era of low rates during in the past few years has also had a profound impact on equity markets. The concept of the "carry trade" comes into effect. Because it is easy to borrow cheaply in currencies that have low interest rates, traders begin to borrow money in that currency and invest it elsewhere, hoping for a greater return. This is similar to borrowing on your credit card to invest in stocks. It is a highly leveraged investment and increases the volatility in the market
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