Currency Values - Importance of Interest rates

Hey guys sorry for the lack of updates as promised i have just been a bit busy.

For this post i thought i would try and explain a bit about how interest rates affect the strength of a currency. As you are probably aware the interest rates in Oz have been going up as of late and if you havent noticed but our currency has strengthened, for example just look at it compared to the US dollar.

One of the reasons that our currency has been gettin stronger is because of a thing called the interest rate parity. What this referes to without going into the maths to much is that the country with a higher interest rate so that being the cash rate that people can invest in is higher than another country a thing called arbitrage becomes possible. because you could say borrow money in america at a near to flat interest rate say can borrow at 1% then invest it in australia at say 3.75% or what ever you are offered from a bank, that means you are able to make 2.75% interest on your money for doing nothing, then you can pay off your loan in america and make profit. So because everyone will want to do this becuase it is almost riskless profit the currency of the country must appreciate (the one with the higher interest rate) while the other one is weaker as people want the stronger one. So to offset the ability to make these profits the currency gets stronger so when you exchange it accross it will end up being fair value.

So basicially without considering to many other factors if the aus interest rate keeps going up and the american stays flat as they are predicting for a while then we could quite easily see parity with the USD... not considering to much else :P