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When we lower interest rates, the value of the currency goes down, because more money is printed. Right?

Yet according to "expert statements" I've read today, when the Japanese lower the interest rates, the value of the yen goes up "because the demand for borrowing money in yen goes up".

What gives?

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you are thinking in absolutes. currency returns are pretty much broken down as follows:

~50% interest rate differentials
~25% growth rate differentials
~15% current account differentials
~10% monetary flows

this is from a barclays decomposition of currency returns study...the #s might be a little off but the gist is there.

your first sentance refers to interest rate diffs -kind of...get back to that later- (if one country lowers rates relative toa nother then the demand for the higher rate country's currency goes up relative to the lower rate country's in the spot market).

the "expert" was referring to the monetary flows.

that being said, this "expert" is either misquoted, misunderstood, or wrong imo.

think about the logic of what borrowing money in japan does to the currency...where does it come from? does that borrowed yen stay in japan??

what do you think the carry trade is?? it involves borrowing in yen and net selling it to invest (unhedged) in higher yielding currencies. this puts huge downward pressure on the yen and has contributed to its weakness int he past year (though now it is obviously strengthening for a variety of reasons).

so can you linkt he article so we can dig a little deeper here? i'd like to see what the context of the statement was.

now, back to this:

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When we lower interest rates, the value of the currency goes down, because more money is printed. Right?

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this sounds like some typical drivel regurgitated from ACists or something (or austrians or whatever group is always commenting on the demise of the dollar).

first off, the statement is totally backwards.

correctly it should read: when more money is released via open market operations, interest rates fall and then currency falls.

in other words, when the decision to lower rates occurs, more money is injected into the system by open market operations in the NY Fed. this excess money lowers interest rates (lower interest rates doesn't result in more money printed. more money released results in lower interest rates). the value of the currency (all else equal) then goes down, not because more money is "printed" but because the relative demand to hold that currency drops when compared with the other available options.

if the BoE keeps rates on hold and US lowers them, more people will want to hold pounds to earn UK rates vs. US rates. therefore people will sell dollars and buy pounds. the "printing of money" has no direct effect aside from the causal relationship it has with interest rate reductions.

it is a nitpicky but important distinction to understand.

hope this helps,
Barron