Interest Rates and Currency Appreciation
I’m a little confused now with the interaction of currency exchange rates and interest rates.
If I put my monetary policy hat on (and quite dashing it is, I might say) I get that if I raise interest rates, money comes flowing into the country / currency and that strengthens the exchange rate because more people want my currency so the “price” of that currency goes up.
However, with my forward premium/discount hat on (less dashing - more of a back-up for my Aunt’s wedding), the currency for which the interest rate is higher is actually trading at a forward discount i.e. it is expected to depreciate vs. the other currency.
Any help would be highly appreciated.
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.