Interest rates and exchange rates

How it works

Higher yields can attract capital, but the effect depends on expected future rates, inflation, credit risk and whether investors expect the currency itself to fall.

What to check

Compare expected policy paths rather than only today's headline rates. Bond-market yields and central-bank communication can reveal different expectations about future policy.

• Compare real and nominal rates carefully
• Focus on expected policy paths
• Include currency depreciation risk

Limits and risks

A high interest rate can reflect high inflation or risk rather than strength. Currency returns depend on both yield and exchange-rate movement.