This statement came out of the answer of one of the CFAi chapter questions, the context is that the correlation between European bond market returns and exchange rate movement is positive. So when euro is weaker, US investor will lose on both bond returns and exchange rate. The text went on and said this, “This can be explained by the idea that a weak currency usually goes with rising interest rates (and negative bond market return).” Can someone please explain this to me? I thought rising interest rate usually means stronger currency no?
rising nominal intrest rates means higher inflation differential … hence countries with a higher nominal rate sees its currency sell at forward discount (it depreciates) vis-a-vis a country with lower nominal rates. but with real interest rates, higher real int. rates attracts foreign capital, increases demand for domestc currency and its value appreciates.
Thanks I guess this has been my problem, identifying when they say interest rate in the economic sense, how do you know if they’re referring to the nominal or the real rate? It doesn’t seem to be always specified.
for me … if a statement can be right even under any one circumstance (though not explicitly mentioned), i presume they are talking about that partcular case. so unless a statement is such that it can’t be right under any circumstance, i agree with it.