How does falling interest rates of one currency affect other currencies?
Oz Z
For instance, if EURO interest rates are reduced, how does it affect EUR/USD exchange rates. Common sense dictates that the EUR/USD would decrease in value as people flock to currencies with higher returns. But this is not only always the case. It may be not the actual reduction in rates, but the commentary (optimism/pessimism for the future) that goes along with it. Comments?
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For instance, if EURO interest rates are reduced, how does it affect EUR/USD exchange rates. Common sense dictates that the EUR/USD would decrease in value as people flock to currencies with higher returns. But this is not only always the case. It may be not the actual reduction in rates, but the commentary (optimism/pessimism for the future) that goes along with it. Comments?
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You make a good point. However, the interest rate cut affects the exchange rate well before the cut actually takes place. Investors estimate how many points the interest rate will be cut and the exchange rate adjusts accordingly. On the day of the cut, if the interest rate is cut more than expected, then the value will fall and vice versa. Then immediately after the adjustment, the exchange rate once again forecasts the future.