chandsingh

The closet thing is the inflation differential, for example........

lets assume country A is the domestic currency and country B is the foreign currency

lets assume the Spot rate for amount of currency A to buy one unit of currency B is 1.2/1......................aka 1:1.2, aka A/B, aka B:A.

If inflation is 4% in country A and 3% in country B we would expect the new spot rate to be 1.2 (1.04/1.03)=1.21165

Expected Spot Rate = Current Spot Rate [1 + Inflation in domestic currency)/(1 + Inflation in foreign currency)]

This makes logical sense as inflation is higher in country A and the currency depreciates relative to currency B. In other other words it now takes more units of currency A to buy one unit of currency B.