Which factor is known to influence currency exchange rates?

Which factor is known to influence currency exchange rates?

• A. Natural disasters
• B. Interest rates
• C. Unemployment rates
• D. Population growth

Answer: (B)

Interest rates are a fundamental factor influencing currency exchange rates because they directly impact the return on investments in a given currency. When a country's central bank raises interest rates, it typically attracts foreign capital as investors seek higher returns on interest-bearing assets. This increased demand for the currency leads to appreciation in its value against other currencies. Conversely, lower interest rates can result in depreciation of the currency as investors look for better returns elsewhere. Interest rate changes also affect inflation expectations and economic growth, which are crucial in determining the health of a country's economy and, by extension, its currency strength. Investors and traders closely monitor central bank policies and interest rate movements, making it a vital component in the currency markets. Natural disasters, unemployment rates, and population growth, while they may have indirect effects on currency values, do not have as significant or immediate influence on exchange rates as interest rates do, making this option the most pertinent factor in understanding currency fluctuations.

Interest rates are a fundamental factor influencing currency exchange rates because they directly impact the return on investments in a given currency. When a country's central bank raises interest rates, it typically attracts foreign capital as investors seek higher returns on interest-bearing assets. This increased demand for the currency leads to appreciation in its value against other currencies. Conversely, lower interest rates can result in depreciation of the currency as investors look for better returns elsewhere.

Interest rate changes also affect inflation expectations and economic growth, which are crucial in determining the health of a country's economy and, by extension, its currency strength. Investors and traders closely monitor central bank policies and interest rate movements, making it a vital component in the currency markets.

Natural disasters, unemployment rates, and population growth, while they may have indirect effects on currency values, do not have as significant or immediate influence on exchange rates as interest rates do, making this option the most pertinent factor in understanding currency fluctuations.