Finance, Forex and Investments

How does increase in interest rate lead to increase in exchange rate?

If say US has a higher interest rate than Australia, why would it attract more people from Australia to exchange Au$ to US$? A higher interest rate means you earn more with the amount of money you've saved at the bank but if an Aussie exchanges his/her money they won't be saving their US$ in a bank in US would they? So why would a higher interest rate in US attract them? Sorry I know this is a lame question but I've just started learning eco..

Public Comments

1. High interest rate in the US will inspire Aussie investors to exchange to US$ and invest in the US in the form of Bank deposit or government bonds.That cause the Aussie dollar to weaken against the US dollar. Higher US interest rate will inspire all country's investor, including the EU,Japan and China to come and invest in the US the same what the Aussie did. Higher interest rate means also the economy is picking up, and the stock market will gain some points. Hot money flown in the US will cause the US dollar stronger against all currencies including Aussie dollar.
2. International investors seek the highest total return on their money as possible. All things else being equal, a higher interest rate in the US will cause some to shift their money into dollars. After all why not earn more interest. However, not all things are equal, when the investors want to go back to AUS dollars the dollar may have depreciated. Lots of factors will affect the currency exchange rate. Growth, debt levels, and future expectations about these factors are important. Where the money is kept is of no concern to some investors. In reality there are banks around the world that will accept U.S. Dollar denominated deposits. There is a bank in Missouri that accepts Euro Deposits but none I know of that will keep Aus $'s.