What effects do rising interest rates have on the value of the Australian dollar?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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All other things being equal, an increase in interest rates in Australia relative to other countries should cause the Australian dollar to rise in value relative to those other countries' currencies.  Please note that this only applies to real interest rates: the interest rates relative to expected rates of inflation.

If real interest rates rise in Australia, more foreign investment money will be attracted to Australia.  Foreigners will want to lend money in Australia because they can get a higher rate of return on their loans.  When this happens, the demand for Australian dollars will rise (because foreigners have to buy Australian dollars in order to loan them out).  An increase in demand for Australian dollars will (all other things being equal) cause an increase in the value of the Australian dollar.

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