2 FX Theories Contradicting Each Other?


Uncovered Interest Parity says that the country with higher interest should expect its currency to depreciate. Later in the reading, it says that a country that has high interest should expect high cash inflows, or current account surplus, therefore it should expect its currency to appreciate. Is it a short term vs. long term thing? I dont think so; don’t the reading say that changes in exchange rate due to surplus or defecit in current account tends to be sluggish (and of course, on the other hand, the uncover interest parity is a long term recalibration process)? Am I confused? Can someone clarify?


uirp higher interest rate country depreciate typo

just fixed it thanks:D

Many forces affect exchange rates. Interest rate parity is one, supply and demand is another.

Not all forces point in the same direction. That shouldn’t be surprising.