I got tripped up on this mock exam question and haven’t been able to find clarity… can anyone help?
the text (and answer in the mock) was that a higher interest rate country will attract capital and drive up the currency strength. Makes sense
but isn’t the whole uncovered interest rate parity concept based on the higher interest rate country’s currency weakening?
example, in a carry trade, you borrow in the low and invest in the high i.r. currency, but the main risk is that the currencies converge (ie, high rate currency weakens). I thought this was the general expectation, not for the high rate currency to move higher.
Can someone tell me what I’m missing?? Cheers!