why does a currency appreciate if bond prices go down/bond yields increase


My understanding is if bond yields increase it creates demand for a currency. But that means bonds are being sold if yields are increasing? So if bonds are being sold and not bought, thus not creating demand for a currency, why do currencies have a positive correlation with bond yields?

Can you see why I’m struggling? Sorry if stupid question.

In: 6

The primary reason why a currency would appreciate when bond prices go down and bond yields increase is because it typically reflects an improvement in economic fundamentals. An increase in bond yields usually indicates an improvement in investor confidence, as investors demand higher returns for taking on the risk of investing in the bonds. This, in turn, can lead to an improvement in the health of the economy, which can create increased demand for the currency of that particular country or region. In essence, investors are willing to pay more money to hold the currency due to the enhanced economic conditions, which leads to an appreciation of the currency.

Think of it this way: If something costs more, people want to buy it less. If bond yields go up, it means borrowing money is more expensive so people don’t want to borrow and borrow more. Instead, they prefer to buy and hold a currency instead, which increases demand for the currency and can cause its value to increase.

The easiest way to understand demand for a currency is to think of it as the *demand for involvement in a given economy*. If you want to buy US goods, invest in US companies, or own US bonds, then you need USD.

If USD bond prices decrease, then USD interest rates go up. Higher interest rates are more attractive to investors, which drives demand for USD.

Another key consideration is inflation. As interest rates increase, it gets more expensive to borrow money. This slows down business investment activity and cools the economy overall, which reduces inflation. If price levels in the US are lower than in other countries, US goods become more attractive to import, driving additional demand for USD.

The actual act of selling bonds isn’t a big driver of exchange rates on its own. It’s certainly a piece of the puzzle, but the interest rate impact on exchange rates is much larger in comparison.

currency goes up cause if bonds yields are higher as an investor i have to sell my yen/euro to buy more dollars to buy those better bonds which makes the dollar go higher.