Currency and Interest Rates currency, understand, expected, interest

torontoanalyst

I understand how a currency reacts to inflation ie if inflation in country A is high, its currency is expected to depriciate. But not sure how a currnecy reacts (appreciates or depriciates) to rise and fall in interest rates (real and nominal).

Pegasus2008

If real interest are higher in USA compared to Canada, more foreign inflows will come in increasing demand for USA and reducing supply therefore holding all constant, should technically appreciate the dollar.

SpyAli

but accoriding to IRP, shouldnt it depriciate?

mengxu

real rates go down, currency gets weaker. if the reduction in inflation is less than the reduction in the nominal interest rate, the real rate is going down and currency devalues. if inflation gets reduced, the currency appreciates. you can't answer the nominal rate question without knowing how much inflation is baked in there.