Notes on Quicktips: T-Bills, Interest Rate, and Inflation Rate
My friend gave me a pretty important add-on tips on my quicktips post today. He said that in foreign market and foreign economy, the increase in the interest rates doesn’t always mean the increase on their currency value.
To forecast how their local currency would react we need this following equation.
T-bill yield > interest rates - inflation rate
This means that if T-bill yield (that’s the US government bond) of return is higher than the calculation of local interest rates minus the inflation rate then you can safely say that the local currency will be weaker relative to the dollar.
But if we change the equation to the following:
T-bill yield < interest rates - inflation rate
Which is the direct opposite from the previous statement (T-bill yield is lower thant the local interest rates minus the inflation rate), we can safely project that the local currency will be stronger relative to the dollar.
Hope this helps.
dear oskar,
apa kabar? udah total recover blm loe?
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thanks.
Adie.