Question

There are some countries (i.e. Venezuela) that commonly experience high rates of inflation. When this occurs downward pressure on the country’s currency results. Why?

Answer 1

Hig inflation leads to lesser purchasing power of currency and the value of currency drops. High inflation leads to higher interest rates which lead to lower value of currency.

Exchange rate expected in future=(1+Interest rate in foreign currency)/(1+domestic interest rate)
This will lead to lesser value of domestic currency per unit of foreign currency.

According to international fisher effect the increased amount of inflation should cause the currency in the country with the high interest rate to depreciate against a country with lower interest rates.