Economics/Portfolio Management

[Zanalyst]

If Domestice (your country’s) interest rates increase, does this lead to an appreciation of your currency or a depracation? the reason why im asking is, in some reading they use the interest rate parity formula in which case your currency will depreciate (1+rd)/(1+rf)sd/f and in others they use a qualitative explanation, if your countries (domestic) interest rates increase then more investors will demand your currency to invest in you country, which would lead to an appreciaiton of the currency. Am I missing something here?

 

[waldziuchna]

In your first example they mean nominal interest rates and in the second real, hence the difference. International asset pricing sucks big time…

 

[BMiller12]

That’s the key. I had the same issue because the books don’t explicitly lay it out (at least up front) and it seems contradictory, but it all hinges on the difference between nominal and real interest rates.
More clear once you get into the fisher equation and uncovered PPP. Increases in nominal rates do cause depreciation..which is the result of the increasing inflation component of the nominal rate.