Exchange Rates

In countries that allow free flows of capital and a floating exchange rate, interest rates and the exchange rate are tightly linked. If interest rates are relatively high, capital will flow into the country, which strengthens the exchange rates, making imports cheaper and exporting harder. When interest rates are low, the opposite happens.

In the past, many developing countries have kept their interest rates low, to weaken the value of their currency in order to strengthen their exporting sector.

In the current economic climate, most nations are worried about inflation. If their currency devalues, the cost of imported good and services will increase, feeding into rising prices. This is a problem when they are fighting inflation, so most nations are keeping their interest rates relatively high in order to keep their currency strong.

Of course, this policy is self-defeating if every nation does it.