Re: interest rate vs currency

For a change, I should be able to answer this question. :)

> Why should there be a higher demand for a currency if that country's
> interest rates are raised? Why would I be interested in the dollar if
> the fed. res. raises interest?

Usually, when the Feds (or any nation's central banker) raises rates,
this is viewed as a great sign for that country's economy (but not
their stock markets or bond markets).

When that country raises its rates, this means that their investments
will also raise its rates. If nation A has a higher interest rates
than nation B, then citizens of nation B will invest in nation A.

Don't confuse *Real* rates, from *inflation* rate, and *nominal* rate.


Nominal Rate = Inflation Rate + Real Rate.

A currency is desirable if the nation's *REAL RATE* is higher, but it
is less desirable if their inflation rate is higher - in a very
simplistic model.

There is a model in Economics called the Fisher Equation which deals
with all this.

> If I would borrow money from the bank in the US, I would have to pay back more... > I'd get my money out of the US to some country with low interest.

Why would you want to keep your money at a foreign bank when they are
paying lower interest rates?

Regarding borrowing from countries with lower rates: This is exactly
what we're doing with the Japanese. Their interest rates are very low,
and ours is a lot higher. So they buy our dollars. Another words, we
borrow money from them, and now they have our dollars in the form of
bonds/treasuries/bills/notes. In a way, we are like a high-interest
rate paying bank, and they are the depositors earning interest.

This is partly what's keeping our interest rates relatively lower.

Also, because they love to save their money in banks instead of
squandering out like us Americans, they are anxious to lend us money
(another words - they are anxious to deposit money at the "BANK").
Because of this, they have TONS and TONS and TONS of dollars - moreso
than any other country in the world.

I'm not sure if this makes their currency weaker relative to ours, but
that's a different story.

.

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