You can lend money to one of the following two countries🇫🇷🇬🇧:
The UK willing to pay you 0.5% per year in interest
France willing to pay you 1% per year in interest
Who do you choose?🐮
Well, naturally you want to get paid the highest rate interest, so you’d choose the British🐴. To do that, you have to first buy UK pounds so that you can lend them to the British. When more people do this same thing may be due to the favourable interest rates offered in the UK , this raises the value of the pound. 🤗🤗 But what if interest rates change due to the amount of money falling into the Uk making interest rates less competitive🙄🤔. In this case, you will sell your Uk investments and sell your UK pounds to put in the next best country.
If this is France🇫🇷 then you will be putting your money in France by buying euros and selling UK pounds. This means the demand for pounds will go down and Euros will go up. This will be reflected in their pricing as well.🚀 And that’s exactly how interest rates affect the value of currencies🌐🌎. Money likes to go where it gets the highest return and so, all else being equal, lower interest rates cause a currency’s value to decline.
There are other things that affect the value of money aside from interest rates e.g inflation