This is from the self-test of the Currency Risk Management topic, Book 4 of Schweser.
"A decrease in the domestic interest rate would result in an increased value in the domestic currency as reflected in a lower futures rate.
This can be observed in the IRP equation with the domestic currency in the numerator and the foreign currency in the denominator." Here’s what I’m puzzled over: It is my understand that countries with high interest rates (high but not hyper-inflation high) would attract foreign capital as it’d be more attractive to invest in, resulting in an appreciation of currency due to increased demand.
Investors may view the economics of country A verse country B more favorable, or may want to enact a carry trade …sometmes (not always).
(Correct me if I am wrong) I believe in the reading, it says interest rate parity is a good long-run relationship, but poor at predicting anything in the short-term. Thus other factors may be better at predicting short-term relationships between currencies.
I’m presume that the exam questions will be quite clear on which relationships/phenomenons that it will want you to extrapolate on.