Foreign exchange rate is defined as “the rate at which one country’s currency may be converted into another”. Money exchange rates are determined by several factors including, interest rates, current account on balance of payments, economic growth and inflation.
If you are an expat sending money home; an aspiring Forex trader; a finance enthusiast who is enamoured by world economics, then you must know the reason(s) why foreign exchange rates fluctuate.
In this context, the rate that is charged for using or saving money of a particular country is called an interest rate. Charged when money is borrowed, paid when money is saved, interest rates of a country attribute to the value of foreign exchange rate of its currency.
For e.g. If India’s interest rates rise compared to other countries for investments, it will attract more foreign investments, thereby earning more savings in Indian banks. This will increase the demand for the Indian Rupee, causing a rupee appreciation.