As per international fisher effect:
E=(i1-i2)/(1+i2) which is approximately equal to i1-i2
E=percentage change in exchange Rate
i1=Country A’s interest Rate
i2=Country B’s interest rate
The logic of Fisher effect is that the country with higher interest rate will have higher inflation rate.
This will have the effect of the currency of the country having higher inflation rate will depreciate against the currency of the country having lower interest rate (consequently lower inflation).
Interest rate in the united states = 7 percent
Interest rate in the united kingdom= 5 percent
The interest rate in United Kingdom is lower. Hence British Pound will appreciate against US dollar by (7-5)=2%
According to the international fisher effect the British pounds spot exchange rate should Appreciate by about Two percent over the year.
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