William and All -- William said, "A borrower sees lower interest rates as attractive because it is less money the have to pay back and can invest the borrowed money into their own economy. An investor sees lower interest rates as less attractive because it devalues U.S. currency and makes our exports look cheaper."Likewise, a former student said,"This would diminish the potential return from the investment, and might even cause a loss in money if the investment wasnot as lucrative as planned. If a business used this investment strategy, they would then need to increase prices on customers to make up for what they lost." As our former student alluded to: Speculation can affect interest rates.

For example, if investors/speculators expect interest rates will fall in the U.S. compared with Canada and/or inflation in the U.S. will be lower than inflation in Canada, then investors/speculators will buy more U.S. financial investments (bonds, etc.) and fewer Canadian investments. Consequently, the US$ will appreciate relative to the C$, as demand for the US$ rises.

Class -- What examples do you have of how speculation could affect exchange rates?