Hi friends, Increase in interest rates lead to a decrease in inflation as consumers tend to have less money to spend. So this means that the purchasing power of currency increases. But here is the confusing part… As per interest rate parity theory the country that has higher interest rate will face depreciation in its currency value relative to the one with lower interest rate… Will the currency value increase or decrease? Pls help
There are many forces that act on currency exchange rates, not all in the same direction.
Interest rate parity is one (and, generally, a weak one at that), and supply/demand is another (and, generally, a strong one); they tend to act in opposite dierctions.