Appreciation/Depreciation - Interest Rates

CFA Level II Economics
#1

Based on the Uncovered Interest Rate Parity, the country with the higher interest rate, their currency will depreciate relative to the currency with the lower interest rate.

When reading about the Mundell-Fleming Model and the appreciation/depreciation in high capital mobility or low capital mobility, I see for example in Scheser it explains, an expansionary monetary policy will reduce the interest rates and consequently reduce the the inflow of capital investment and the decrease in financial inflows reduces the demand for the domestic currency, resulting in depreciation of the domestic currency.

When I look at these two concepts I see:

  1. lower interest rates lead to APPRECIATING currency for the uncovered interest rate parity.
    1. lower interest rates (expansionary monetary policy) leads to DEPRECIATION of the currency.

I feel like I am missing something here? Thanks for the help!

#2

Both are correct and both are different theories which are sort of mutually exclusive. That’s about it! Uncovered IRP isn’t the only rule that holds. Same is the case with the other one.

#3

Thank you… I understand that they’re different theories but it’s tough to logicially make sense of them both when they’re completely opposite.

#4

Many things affect exchange rates. Interest rate parity is one; supply and demand is another.

They don’t always pull in the same direction as each other.