On the one hand, interest rate is the most important factor affecting the exchange rate. When interest rates rise, credit will be tightened, loans will be reduced, investment and consumption will be reduced, and prices will fall. To a certain extent, it will curb imports, promote exports, reduce foreign exchange demand, increase foreign exchange rate, and the local currency exchange rate will rise. At the same time, when a country's interest rate rises, it will attract international capital inflows, thus increasing local currency demand and foreign exchange supply, making the local currency exchange rate rise and the foreign exchange rate fall. Falling interest rates, expanding credit, increasing money supply, stimulating investment and consumption, and pushing up prices are not conducive to exports, but to imports. In this case, the demand for foreign exchange will increase, which will lead to an increase in the foreign exchange rate and a decrease in the local currency exchange rate. At the same time, falling interest rates may lead to international capital outflow, increase foreign exchange demand, reduce the balance of payments surplus, and promote the rise of foreign exchange rate and the decline of local currency exchange rate.
On the other hand, exchange rate changes have a certain impact on interest rates. The impact of exchange rate changes on interest rates is indirect, that is, it indirectly affects interest rates by affecting domestic price levels and short-term capital flows. When a country's currency exchange rate falls, it will help to promote exports and restrict imports, increase the cost of imported goods, push up the general price level, cause the domestic price level to rise, and thus lead to a decline in real interest rates. This situation is beneficial to debtors and unfavorable to creditors, which leads to the imbalance between supply and demand of loan funds and eventually leads to an increase in nominal interest rates. If a country's currency exchange rate rises, the impact on interest rates is just the opposite.