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CFA Level 2
Economics

Impact of Interest Rate Differentials on Exchange Rates

Medium Currency Exchange Rates Exchange Rate Models

A financial analyst is evaluating the effects of interest rate differentials on exchange rates between two currencies, the USD and the EUR. According to the interest rate parity theory, if the interest rate in the U.S. increases while the interest rate in the Eurozone remains constant, what would be the expected short-term effect on the USD/EUR exchange rate?

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