I know for a fact that during a currency crisis, or just to prop up a depreciating currency in general, Central banks will often increase interest rates. Intuitively, I understood this to signal that by increasing interest rates, the central bank increased yields (particularly on fixed income securities) which made financial assets in that country more attractive. Thus, the foreign money would come flooding back into the economy and therefore the currency would stop depreciating. I have noted such action being done by the South African Reserve Bank in the past and assumed this to be the reason.
However, according to the covered and uncovered interest rate formulas, increasing interest rates results in a currency DEPRECIATING, not appreciating. Therefore, the action of the Central banks in increasing rates should have had the opposite of the intended effect. Can someone please explain why there is this divergence in theory and real world application?