The national interest rate is the euro and the foreign interest rate is the dollar.
So i know that if the national interest rate is equal to the foreign interest rate, the exchange rate is equal to the expected exchange rate.
But i dont understand what happens when the national interest rate is higher than the foreign interest rate.
I know mathematically that if that is the case, then the exchange rate will be higher than the expected exchange rate. First question , But why is it so logically?
Second question :Can you tell me if i'm wrong :
if the national interest rate is higher than the foreign interest rate, then
-this leads to a depreciation of the exchange rate in the future since the expected exchange rate is lower that the current exchange rate.
Third question:Now what happens to the currencies ? What currency appreciates/ depreciates and why ? If the national IR is higher than the foreign one, in which bond would the investor invest in ?
Can you maybe show a numerical, simple example since im new to interest rates and finance ? Thanks!