[Answer] By what mechanism do interest rates affect currency values?

Answer: Global investors are attracted by higher bond yields in high interest rate countries.
By what mechanism do interest rates affect currency values?

An interest rate is the amount of interest due per period as a proportion of the amount lent deposited or borrowed (called the principal sum).The total interest on an amount lent or borrowed depends on the principal sum the interest rate the compounding frequency and the length of time over which it is lent deposited or borrowed.

A fixed exchange rate sometimes called a pegged exchange rate is a type of exchange rate regime in which a currency s value is fixed or pegged by a monetary authority against the value of another currency a basket of other currencies or another measure of value such as gold.. There are benefits and risks to using a fixed exchange rate system. A fixed exchange rate is typically used to …

Fixed exchange rate system – Wikipedia

Floating exchange rate – Wikipedia

Real interest rate – Wikipedia

Real interest rate – Wikipedia

A short-term interest rate (STIR) future is a futures contract that derives its value from the interest rate at maturation. Common short-term interest rate futures are Eurodollar Euribor Euroyen Short Sterling and Euroswiss which are calculated on LIBOR at settlement with the exception of Euribor which is based on Euribor. This value is calculated as 100 minus the interest rate.

Thu Oct 27 2005 14:30:00 GMT-0400 (Eastern Daylight Time) ยท The real interest rate is the rate of interest an investor saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation…

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