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Interest rates, inflation and exchange rates of the country's currency are inter-related. When the interest rates are high in a country, it makes foreign investment more attractive and the lenders are able to reap a higher return compared to other countries. This attracts foreign investment and the exchange rates rise since the currency is now much in demand.
For instance if the interest rates in USA are 10% compared to 6% in Japan, people would get a better rate by depositing money in American banks.Suddenly, the demand for USD will go up. This is called "Hot money flows" and will hike the exchange rate of USD.
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Sep 7th, 2015
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