when a country has a higher nominal interest rate than a different country the first country s currency should see depreciation against the second currency as the first currency will also be experiencing a period of increased inflation 
the international fisher effect ife the international fisher effect ife is an exchange rate model that extends the standard fisher effect and is used in forex trading and analysis it is based on present and future risk free nominal interest rates rather than pure inflation and it is used to predict and understand the present and future spot currency price movements for this model to work in its purest form it is assumed that the risk free aspects of capital must be allowed to free float between nations that comprise a particular currency pair the ife was primarily used in periods of monetary policy where interest rates were adjusted more frequently and in larger amounts with electronic trading and the advent of the retail arbitrage trader the inconsistencies between spot exchange rates are more visible and thus the inconsistency is more quickly noticed and the trade becomes too crowded to be significantly profitable however the ife as well as additional methods of trade confirmation can be incorrectly assessed in this case even though there may not be an empirical advantage to a trade there may be a psychological one if the spot predictions have been incorrectly assessed and acted upon 