High interest rates = strong currency? Not necessarily! Find out why the USD has lost value over the years despite higher interest rates. Discuss with us and share your experiences!
Last week we discussed which factors significantly influence exchange rate changes. Surprisingly, 70% of you said that interest rate differentials play a role. But is that really the case?
. This May Be True in the Short Term, but in the Long Term but not. High interest rates are never an indicator of the attractiveness of a currency. If this were the case, the Brazilian
real and the Turkish lira will be the strongest currencies in the world, and the Swiss franc the weakest.
. A look at the data shows that over the last 22 years, the USD has offered on average 0.32% higher interest rates than the euro and 1.36% higher interest rates than the Swiss franc. Nevertheless, the USD has depreciated significantly against the euro and the franc:
Against the euro: from 0.85 EUR/USD (2002) to 1.09 EUR/USD (today), i.e. -1.28% p.a.
Against the Swiss franc: from 1.57 USD/CHF (2002) to 0.8650 USD/CHF (today), i.e. -2.04% p.a.
. The devaluation has been even more dramatic since the end of the Bretton Woods system in 1973, when the value of the USD was around 0.56 EUR/USD, even though interest rates were on average 0.65% higher than in the eurozone.
. Conclusion: High interest rates do not protect the USD from devaluation. It is therefore important to also look at other economic factors if you want to understand exchange rate developments.
What experiences have you had with exchange rate changes? Share your thoughts in the comments! .
