Economics Reading 13

Why does expansionary monetary policy put a downward pressure on the exchange rate?

If you print money, your money’s worth less.

If you lower the interest rate your money can earn, your money’s worth less.

Another way to think about it is in terms of uncovered interest parity. Expansionary monetary policy = lower interest rates. When you lower interest rates, your currency is less attractive than other currencies (you can invest in other countries in their local currencies and get a higher return). Demand for foreign currencies rise as a result, and as a result, your currency depreciates.