This concept In economics is confusing me. As per reading on Monetary and fiscal policy, a decrease in real interest rate should depreciate the currency because foreigners would pull out money. But as per the concept of interest rate parity, the forward rate should decrease if interest rate reduces which means domestic appreciates with respect to foreign . Can you please help explain this.
Interest rate parity is not intended to predict future exchange rates.
Its only job is to prevent arbitrage.
But I still don’t understand as an investor if I want to engage in currency futures, the interest parity tells me that currency will appreciate but the economic theory says that the currency will depreciate. I am not sure what I am missing.
Let’s try this again: interest rate parity _ doesn’t _ predict future exchange rates.
Interest rate parity _ doesn’t _ tell you that the currency will appreciate.
Period.