Exchange rate drivers

Help me clear things out please.

We know from the covered interest parity that the currency with the highest interest rates will depreciate. But we also know from the relative economic strength forecasting approach that higher interest rate will attract investors and make the currency appreciate because of higher demand for the currency.

How can we reconciliate this two opposite dynamics?

You don’t. There are many timelines and dynamics.

In real life, when a currency moves in either direction, you explain it with an existing theory. But it’s difficult to predict which way it will go, and why.


If it had been that simple, I would be retired by now.