What is a consequence of low short-term rates in relation to foreign exchange markets?

The phenomenon of low short-term interest rates typically results in downward pressure on exchange rates. When a country has low interest rates compared to other countries, it becomes less attractive for foreign investors seeking yield. Consequently, capital may flow out of that currency as investors seek higher returns in countries with higher interest rates. This can lead to a depreciation of the currency in the foreign exchange markets.

Investors are influenced by interest rate differentials when deciding where to allocate their capital. With lower rates, the returns on investments denominated in that currency decrease, leading to reduced demand for those assets. As investors sell off assets in the lower-yield currency and look for better opportunities elsewhere, the value of that currency may decline relative to others, resulting in downward pressure on exchange rates.

Thus, the correct answer illustrates how low short-term interest rates generally correlate with currency depreciation due to shifts in investment flows, enhancing the understanding of currency dynamics in the context of macroeconomic policy.