What is the effect of reducing interest rates on a currency’s exchange rate?

‘Interest rates’ refer to the return on savings and cost of borrowing in a country. If interest rates were to fall in a country, such as the UK, it would become less profitable to save money there. This means, ceteris paribus, that the country will not attract international investors who could make more profit saving their money elsewhere, and may also cause capital flight from the country as existing investors move. As a result, the national currency would see a decline in demand, and as demonstrated by a supply and demand graph, this would mean a fall in its price, which for currencies is the exchange rate.