International Fisher Effect

This theory predicts that the spot foreign exchange rate will change over time to reflect and offset differences in interest rates in the respective currencies.

So for example, unhedged currency depreciation losses will on average negate and match exactly any gains on interest differentials between the two currencies.

One way of speculating that spot exchange rate will not change by as much as this, is known as a carry trade.

Among other things, the International Fisher Effect suggests that it should not be possible to earn consistent profits by entering carry trade speculations.

See also

• Carry trade
• Depreciation
• Expectations theory
• Fisher Effect
• Four way equivalence model
• Interest rate parity
• No arbitrage conditions
• Purchasing power parity
• Spot rate