The general rule is that, as interest rates rise, they tend to increase demand for the currency. Due to higher interest rates, major investors tend to follow fixed-rate currencies.
Yet interest rates don’t just exist. Investors also tend to consider various other aspects such as geopolitical factors, economy overall stability, etc. Interest rates in large developed economies have not increased higher than 3% in recent years.
But if you look at developing economies, you can see higher interest rates. Developing economies typically have interest rates of at least 5%, if not more.
One reason for this is that developing economies tend to attract investors. In exchange for higher interest rates, developing economies can use the money to spend on infrastructure or debt financing.
There’s also a risk with higher rates. Most developing economies have no stable geopolitical scenario compared to developed economies. This in itself creates investor risk.
Returning to developed economies where interest rates aren’t that high, even 2% is sometimes considered a good return.
Investors looking for lower risk, but a slightly higher reward tends to chase higher-rate currencies