How will Interest rates affect currency exchange rates?
By alphason
@alphason (233)
November 4, 2008 9:47pm CST
I am a UK expat living in Thailand and at the moment the GBP to THB exchange rate is awfull. It has fallen from a peak of 71 down to 50's now in a year as you can see in the graph.
It is widely expected that UK Interest rates will be cut on Thursday from 4.5% down to somewhere between 3.5% and 4%. Am I right in saying that if the rate is reduced then the demand for the pound is reduced, therefore causing the exchange rate to fall further?
On the other hand it has been reported this week that mortgage lending has risen slightly, the consumer confidence index has risen slightly and it is anticipated that the UK government will bring forward public spending. So these actions should lead to an increase in demand.
Is this enough to counteract the Interest rate reduction in respect of the currenct rates?
Basically I am asking is it better to exchange some GBP for THB before the rate cut or after, or is all this already factored into the current rate? I will need the money at the end of this month in anycase.
1 response
@rjl1989 (190)
•
18 Oct 09
Generally, the lower UK interest rates are relative to other countries eg. USA, Eurozone, Japan, the lower the value of the pound, as you said.
But also, all the information that is already available is factored into the exchange rate. It only changes when what actually happens is different to expectations. As exchange rates are based on all current information and expectations of future exchange rates. So inevitably you cannot predict what rates will be in future with any certainty. A year after you writing rates are still 54, and the pound is still fairly lowly valued, so i think you missed the boat on getting 71.
