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What is the relation between interest rates and exchange rates?isnt it that when a country’s interest rate is high,that will attract international investors and will appreciate that country’s exchange rate as its demand will be more?
There are many many factors that affect exchange rates in practice (one of which being the one you mention).
However most of the factors are not predictable in advance.In theory there is a three way effect between interest rates, inflation rates, and exchange rates.
Interest rates and inflation rates in theory (and in practice in the longer term) go up and down together. Inflation rates affect exchange rates (see the notes and lecture on purchasing power parity for explanation), and so too therefore do interest rates.For the exam, inflation rates are the best unbiased predictor if you are asked to forecast a future exchange rate.
Relative interest rates are the reason for the quoted forward rates in practice as well as in theory (see the notes and lecture on money market hedging).
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