Q. If a currency falls in value, does the central bank raise or decrease the interest rate to make it gain in value again?

A. Typically the FED won’t move interest rates just for the dollar. Here is a brief run down of how movements in the interest rate affects the dollar.

Change in the short term interest rate: Increase

That means to foreign investors short term assets look more appealing cause you get a better return. That means an increase in demand for US dollars. Conversely, that also means corporate money decreases as people get ancy with the increased interest rate (sign of a slowing economy?) and pull money out. That may slow down the economy and in the medium run (between short and long term) there may be a depreciation of the currency despite the initial appreciation from the initial increase in interest rate (because now the economy may be weakening). Higher interest rates are not always negative things though. It’s a good way to curb inflation.

Originally posted in the forum.