If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, then

Question

Quizplus · Accepted Answer

To determine which currency to invest in, we need to compare their returns after accounting for the exchange rate changes. 
If an investor invests in US dollars and the dollar depreciates by 4 percent against the euro, then the effective return for the investor in euros would be: 
10% - 4% = 6% 
If an investor invests in euros, the effective return for the investor in euros would be: 
12% 
Thus, if the expected dollar depreciation against the euro is 4 percent, the investor should only invest in dollars to achieve the highest return.

If the Dollar Interest Rate Is 10 Percent, the Euro