Changes in currency value (i.e. exchange rate) are related to currency supply and demand. ?The level of interest rates will cause arbitrage behavior. Low-interest-rate currencies will be converted into high-interest-rate currencies at the spot, causing demand for high-interest-rate currencies at the spot.

In the forward period, arbitrage activities end and profit-taking occurs, that is, high-interest currency is exchanged back to low-interest currency, causing an increase in demand for low-interest currency, an increase in the supply of high-interest currency, and forward low Currencies with interest rates appreciate (i.e., premium), and currencies with high interest rates depreciate (i.e., discount). According to the basic theory of covered interest rate parity, the forward exchange rate is determined by the spot exchange rate and domestic and foreign interest rate differentials. The forward premium of currencies with high interest rates (corresponding foreign exchange premium), the forward premium of currencies with low interest rates (corresponding foreign exchange premium) ), the annual premium and discount rate is equal to the interest rate difference between the two countries. In this question, the interest rate spread becomes smaller, so the discount becomes smaller.

Extended information

The impact of raising interest rates on the economy:

With the development of the banking system, because banks pay interest on deposits, society becomes idle Small amounts of funds are deposited in banks to form huge funds. Banks pay interest on deposits, which increases their ability to gather lending capital.

Banks’ adjustment of interest rates has a great impact on the scale of loan capital accumulation. Under certain conditions of idle funds that can be gathered in society, raising deposit interest rates is conducive to absorbing deposits, while lowering deposit interest rates is not conducive. When absorbing deposits, the higher the interest rate, the more fully the idle funds in society will be gathered. Therefore, the level of deposit interest rates and the number of deposits taken change in a positive direction.

The level of loan interest rates changes in the opposite direction with the borrower's income. Raising loan interest rates will reduce the profits of borrowing companies, reduce profit opportunities, reduce borrowing behavior, and reduce the number of loans and investment scale.

When loan interest rates rise to a certain level, borrowing companies will not only reduce new borrowings, but even shrink existing production scale, withdraw capital from the reproduction process, and convert production capital into loan capital in order to obtain higher interest; conversely, lowering loan interest rates reduces borrowers' borrowing costs, increases income, and increases profit opportunities, and borrowers will increase borrowings and expand production scale.

Therefore, the level of loan interest rates and the number of loans change in opposite directions, and the state can adjust the scale of credit by adjusting the level of bank loan interest rates.