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.