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Currency Move Based on Real Interest Rate Movement
This may be a dumb question but I feel I see a different answer every time so I wanted to ask all of you what do you think.
If the interest rate differential moves or is expected to increase, would the currency of the increasing interest rate appreciate or depreciate? In practice, I think the currency should appreciate due to new flows coming in but I have read that in theory, the currency should depreciate. What is the real answer? There are many ways you could think about this such as the currency depreciating due to the higher rate decreasing GDP etc etc but in context of the CFA, should it depreciate or appreciate?