How do interest rates influence currency trading?

Higher interest rates typically strengthen a currency because they attract foreign capital seeking higher returns on investments. When a country raises its interest rates, it offers better returns on savings and fixed-income investments compared to other countries with lower rates. This can lead to increased demand for that country's currency, as investors need to purchase it to invest in those higher-yielding assets.

Additionally, stronger interest rates can signal a robust economic environment, further enticing foreign investors. As they invest, the increased demand for the currency itself causes its value to rise in the foreign exchange market. This relationship between interest rates and currency strength is a fundamental concept in forex trading and macroeconomic analysis, reinforcing the importance of interest rates in shaping currency values.