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This strategy (interest raise to minimize currency devaluation) is being adopted in countries like Brazil and Russia:

How does the interest rate rise protect the currency value?

I'm used to see news about governments raising the interest rate with the aim of protect the currency value. But I never saw an explanation about how these two things are related.

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    $\begingroup$ Would you mind clarifying the question and giving more explanation than just the links? $\endgroup$
    – Mathematician
    Dec 16, 2014 at 20:54
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    $\begingroup$ Good question, bad formatting and grammar. $\endgroup$
    – Thorst
    Dec 17, 2014 at 11:43
  • $\begingroup$ Hello @Soccerman, I accept suggestions / reviews. Despite I understand well English language, I'm still learning grammar. $\endgroup$
    – cassioso
    Dec 17, 2014 at 12:43
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    $\begingroup$ @cassioso Thanks! Would you mind meshing that explanation into the question itself? $\endgroup$
    – Mathematician
    Dec 17, 2014 at 15:59
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    $\begingroup$ @Mathematician done! $\endgroup$
    – cassioso
    Dec 17, 2014 at 19:06

2 Answers 2

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An interest rate is the return that a lender earns on money lent to someone else. If the interest rate is higher then it makes lending money more attractive because the return is higher.

In particular, if the interest rate in, say, Russia increases relative to that in the USA then American lenders will switch from lending their money in America to lending their money in Russia where the return is greater. But in order to lend money in Russia, these investors are first going to have to convert their dollars into roubles. This increased demand for roubles causes the price of the rouble (i.e. the exchange rate) to increase.

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According to uncovered interest parity model, if you raise the domestic currency's bank deposit interest rate, then, ceteris paribus, the currency will appreciate. This can be shown mathematically.

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    $\begingroup$ Why not adding some parts of that mathematical explanation? That would greatly improve your answer. $\endgroup$
    – clem steredenn
    Oct 21, 2016 at 6:03

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