If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts and those currencies would be expected to depreciate.

Question

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If interest rate parity holds, it means that the difference in interest rates between two countries should be equal to the difference in their exchange rates. The international Fisher effect (IFE) states that the difference in interest rates between two countries should be reflected in the expected change in their exchange rates. Therefore, if a foreign currency has a relatively high interest rate, it should have a forward discount (a lower exchange rate in the future) according to interest rate parity and the IFE. This means that the currency would be expected to depreciate in value.

If Interest Rate Parity Holds, and the International Fisher Effect