This is a good example for AS students which illustrates how a change in interest rates can affect the exchange rate. Late on Thursday the US Federal Reserve raised their discount rate - the price at which banks borrow emergency money from the Fed - from 0.5% to 0.75%.
The move was unexpected, and has given rise to plenty of speculation that they will follow this with a rise in their federal funds rate - the benchmark rate at which banks lend to each other and is used to set rates on mortgages and car loans.
That means that currency speculators have bought the dollar heavily, betting on further rate rises and pushing the exchange value of the dollar up to a nine-month high against a basket of other currencies.
http://www.tutor2u.net/blog/index.php/economics/comments/us-rate-rise-causes-hot-flows-of-money/
