The principle of interest rate parity dictates that exchange rates and interest rates should move in opposite directions. In addition, when a country raises interest rates, it often experiences a surge in capital inflows, from investors who wish to earn higher risk-free returns. Likewise, currency traders and economists keep a close watch on interest rate levels, which often precede movements in forex markets. Fortunately, it seems central banks, which set short-term interest rates in most countries, are becoming more transparent. According to a new study, in the last decade, every major central bank has become progressively more open about its intentions for monetary policy, including inflation targets. In theory at least, currency traders should be able to count on central banks to unwittingly provide clues on the direction of currencies. The Economist reports:

The Fed, for instance, has been publishing minutes of its meetings more speedily since the start of this year. Ben Bernanke, the Fed’s chairman-designate, favours an explicit inflation target.

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