on pg. 369 of the book three. it says Currency’s Real Exchange Rate will increase when the real or nominal interest rate increases ( attracting foreign capital). Does that contradict the uncovered interest parity? under UIP, currency with higher interest rate is likely to depreciate right?
Yes.
But interest rate parity doesn’t try to predict future exchange rates. That’s not its job.
I would never say “will” increase. Better to use should. it is an opinion. interest parity is used to price the futures and if this prediction how exchange rates behave were always right, you could arbitrage away. It is an empirical observation, but not a foregone conclusion. At least the is my understanding.