I am trying to understand the effect of increasing interest rates on a country’s currency. According to reading 18, an expansionary fiscal policy (increasing interest rate) increases demand on domestic currency and hence it will appreciate.
High real interest---- Currency appreciates
But the international Fisher relation says that increase in interest rate has a similar effect as increasing inflation.
High nominal interest – Currency depreciates
I find this hard to understand since real interest rates are proportional to nominal interest rates; how can they have opposing effects on currency valuation?
Thanks for your time,