Interest Rates and the Dollar

Why do interest rates move the dollar? In 2022 the Federal Reserve raised its main interest rate seven times, from 0–0.25% in January to 4.25–4.50% in December, and by late September the dollar was worth about 11% more against the currencies of America's trading partners than in January. Higher rates usually lift a currency, but not always: in April 2025, rates on US government bonds rose sharply compared with German ones, and the dollar weakened instead. This video follows a made-up investor with $10,000 worth of euros: at 5% a year in the United States and 3% in the eurozone, the US pays $500 instead of $300, or $200 more. It shows why the gap between countries' rates matters, how a 2% fall in the dollar can wipe out the extra interest ($10,500 × 0.98 = $10,290, against $10,000 × 1.03 = $10,300), and what economists call interest rate parity. It's a general explanation, not financial advice. Currency converter in our app: ▶ https://www.metric-conversions.org/currency/ Chapters: 0:00 The puzzle 0:36 The Fed's main rate 0:51 Money goes where it earns more 1:46 The catch 2:22 When it didn't work 2:49 Takeaway Sources: • Open Market Operations, Federal Reserve: https://www.federalreserve.gov/monetarypolicy/openmarket.htm • H.10, Nominal Broad Dollar Index, daily, Federal Reserve: https://www.federalreserve.gov/releases/h10/summary/jrxwtfb_nb.htm • How does the Federal Reserve affect inflation and employment?, Federal Reserve FAQ: https://www.federalreserve.gov/faqs/money_12856.htm • Fischer, The Transmission of Exchange Rate Changes to Output and Inflation, Federal Reserve, 12 Nov 2015: https://www.federalreserve.gov/newsevents/speech/fischer20151112a.htm • Key ECB interest rates, European Central Bank: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html • The dollar and euro exchange rates break even, FRED Blog, St. Louis Fed, 4 Aug 2022: https://fred.stlouisfed.org/blog/2022/08/the-dollar-and-euro-exchange-rates-break-even/ • The link between interest rates and exchange rates, FRED Blog, St. Louis Fed, 19 Feb 2026: https://fred.stlouisfed.org/blog/2026/02/the-link-between-interest-rates-and-exchange-rates/ • Currency Conversion, metric-conversions.org: https://www.metric-conversions.org/currency/ Is there anything else you'd like us to cover? Let us know in the comments below.