The most important single factor in determining the exchange rate in the short run is

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Interest rate differentials have an immediate impact on exchange rates because they affect the demand and supply of a currency. When a country has higher interest rates, its currency becomes more attractive to investors seeking higher returns, leading to an increase in demand and appreciation in its exchange rate. Conversely, when a country has lower interest rates, its currency becomes less attractive, leading to a decrease in demand and depreciation in its exchange rate. Inflation, monetary growth, and price differentials may also affect exchange rates in the short run, but typically have a more gradual impact over time.

The Most Important Single Factor in Determining the Exchange Rate