In the global economy, it goes without saying that all types of economic marketplaces are interconnected. Often, a rally or decline in the stock market will affect the bond market, and vice-versa, as money is shuffled back and forth between equities and bonds. For example, investors pulling their money out of a bear market need somewhere else to put it, and often this excess capital winds up purchasing corporate or municipal debt. Likewise, real estate values can be affected by inflation when the Federal Reserve Board raises or lowers interest rates to combat a rise or fall in consumer prices. When interest rates go higher, home buyers are able to afford less, which sends prices south. Another marketplace that interest rates can affect is the forex, or Foreign Exchange Market.Â
The main way that interest rates in the United States economy can affect the forex market is by helping to funnel money in and out of foreign investments. When interest rates are low, investors that are looking for a safer alternative than equities often turn to foreign investments such as the bond markets of other countries. For example, when the stock market crashed in 2000, most investors shifted their focus from trying to maximize their returns to preserving capital. The logical place to turn in this case was the government bond market, but interest rates were hovering around two percent and were headed even further down. Australia, however, was offering government debt with an interest rate of around five percent, and the risk was about the same as that of U.S. bonds, so naturally a lot of money flowed into that country to buy bonds in the denomination of the Australian dollar. When a large amount of money is shifted from one currency to another, it affects their prices due to a shift in supply and demand.Â
