Does interest rate parity hold? If not, why not? Will the Brazilian real appreciate further or depreciate against the U.S. dollar if the Fed raises the interest rate while the Brazilian interest rate remains at 8.75 percent a year?
The Brazilian real has appreciated 33 percent against the U.S. dollar and has pushed up the price of a Big Mac in Sao Paulo to $4.60, higher than the New York price of $3.99. Despite Brazil’s interest rate being at 8.75 percent a year compared to the U.S. interest rate at near zero, foreign funds flowing into Brazil surged in October.