STEM major here. I saw this recently about how Japan raised its interest rates to .25%. Can someone please explain to me how this strengthens the yen? In addition to this why would the US increasing interest rates at this time decrease the value of the dollar? Please help me I’m lost here 😅 have a great day everyone!
In: Economics
Money is mostly created when customer facing banks borrow from central banks. The higher the interest rate the central bank charges, the less demand from the customer banks, so less money is created. Less of something means it is more valuable, so the currency becomes stronger.
The interplay among different currencies is more complex, but very simply the major currencies sort of compete to be the standard by which others are measured. If one currency gains in strength the others may drop even in relation to a third currency. Basically there is a market of people who want to park money in the “safest” currency, when a currency becomes more valuable more of that market will think it’s the safest.
(Before anyone goes all “ackshually” on the above, I know it isn’t 100% accurate. It’s a drastic simplification of a complex phenomenon for ELI5.)
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