Forex traders keep a keen eye on the interest rates maintained by central banks around the world. If there is a change in interest rates, it is bound to affect the currency markets related to that country. The reasons for the revision in rate determine whether the impact on the currency exchange rate will be positive or negative.

Not all increases in interest rates reflect positively on the currency’s value in the Forex market. Sometimes, central banks are forced to increase interest rates to attract more capital to get their governments out of fiscal trouble. As a rule of thumb for the Oracle Trader, interest rates are a reward for the risk investors are willing to take: the higher the risk of loss, the more interest demanded by the investor.

Certain countries going through economical turmoil due to failed fiscal policies need investment to dig themselves out of the hole. The recent case in point has been Greece and other cash-strapped nations in the European Union. Investors experienced a crisis of confidence when they saw galloping fiscal deficits in Greece. The country had no choice but to hike its interest rate to attract international capital.

In spite of Greece raising interest rates, the Euro experienced a reversal against other major currencies like the US dollar. The Euro’s exchange rate against the US dollar, dipped to as low as 1.20, a level not seen in a long time. Traders had obviously sensed that the interest rate hike in Greece actually indicated the worsening economic situation there. They took this cue to hammer the currency down.