The relationship between interest rate and exchange rate is a long-term and complicated issue, which involves the development and evolution of the monetary system. Judging from the 200-year history of currency development, the basic direction is the evolution from fixed exchange rate to floating exchange rate. Behind the evolution of exchange rate system is the evolution of global political and economic trends. Two world wars and two industrial revolutions have changed the class composition of major western countries, and the working class and middle class have become important electoral forces. Therefore, the importance of controlling inflation and promoting employment has greatly increased. With the gradual withdrawal of mercantilism from the historical stage, the importance of the external equilibrium goal has declined, and the central bank's monetary policy goal has gradually simplified, focusing on employment and inflation. According to the theory of impossible trinity, an open economy with capital flowing on its own cannot have an independent monetary policy and a fixed exchange rate system at the same time. In practice, after efforts to maintain a fixed exchange rate system failed, central banks gradually handed over exchange rates to the market and independently used interest rate instruments to regulate domestic employment, growth and inflation. Interest rate can be understood as the cost of borrowing funds, and it is usually used as a price-based tool for the state to carry out macro-control and conduct monetary policy. According to the national economic situation, interest rates can be adjusted to release or tighten liquidity to the market. From the micro level, the gains and losses of holding foreign exchange positions include interest income and costs in addition to exchange rate changes. Therefore, when other factors remain unchanged, when a country's interest rate rises, the attractiveness of currency will increase, and the probability of exchange rate appreciation will also increase.
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