Higher rates and appreciating currency. Or not

[Ctribbs12]

So according to los28d “increases in the value of a currency are associated with higher real or nominal interest rates. “
according to the same Los, now referring to the carry trade, it states ” the currency with the higher interest rate will trade at a forward discount.”
this is means that it should actually depreciated, correct?
some clarification would be much appreciated

 

[NANA Hachiko]

Hi,
I can perhaps try to answer this.
This is basic interest rate parity, it explains the relationship between interest rates and currency exchange rates. The basic premise of interest rate parity is that hedged returns from investing in different currencies should be the same, regardless of the level of their interest rates.
The answer to your question is yes. The currency with higher interest rate will have a lower forward rate (or trade at a forward discount) against another currency to make even, otherwise arbitrage opportunity exists.

Another way to look at it is that a currency with lower interest rates will trade at a forward premium in relation to a currency with a higher interest rate. In other words, there is no interest rate advantage if an investor borrows in a low-interest rate currency to invest in a currency offering a higher interest rate.

 

[Ctribbs12]

Thank you, I see your point.
Maybe I’m thick, but why then does the earlier statement assert that a higher interest rate currency should appreciate but then later state that the higher interest rate currency depreciate?

 

[janakisri]

economics is much like astrology , just a bit worse at predictions!
A country with a strong economy may yet want to diversify and want to attract Foreign Direct Investment and knowhow. It may raise interest rates to attract capital. Investors may flock n when they realize that they can get good returns with low risk. The flows should elevate the currency relative to the investors own currency.
Very different case happens when the economy is doing poorly . As inflation picks up the county might raise rates to try and control it, but this might be perceived as anti-business and could be seen as anti-growth. if investors perceive higher risk in the future , they may leave inspite of the rate incentives. This will cause the currency to depreciae.