Interest rates v/s currency rates

[Sanjay Sachdev]

Hello everyone,
can someone plz explain me that what is the relationship b/w interest rates and currency rates ? is it like this..if there is high interest rates in the country than that country’s currency is trading ot discount compared to other currency/base currency ? need ur thoughts guys…plz give ur explaination with example if possible. Thnx

 

[S2000magician]

There are (at least) two effects here:

1. Interest rate parity, which says that the currency with the higher interest rate will depreciate vis-à-vis the currency with the lower interest rate.
2. Supply and demand: the currency with the higher interest rate will be in greater demand, which will cause that currency to appreciate vis-à-vis the currency with the lower interest rate.

What happens to the exchange rate will depend on the relative size of these two effects.

 

[MrSmart]

Expected future inflation.