Expected interest rate and exchange rate

Question

How does expected interest rate affect foreign exchange rate?

Can anyone give me an example?

Thanks in advance!

Answer 1

As a particular country's interest rate rises, this attracts investment to move into that country's currency.  This causes the country's exchange rate to increase.

Example: US and Japan. US$/YEN

If the US interest rate is expected to rise, investors shift investments to US assets and away from Japan assets, which results in an increase in the US$/YEN exchange rate (an appreciation of the US$ and a depreciation of the YEN).