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In the following table, we work out the return on euro deposits (in terms of dollars) for various levels of todays dollar/euro exchange rate, always
In the following table, we work out the return on euro deposits (in terms of dollars) for various levels of todays dollar/euro exchange rate, always assuming that the expected future exchange rate remains fixed at $1.05 per euro and the euro interest rate is 5 percent per year. As you can see, a rise in todays dollar/euro exchange rate (a depreciation of the dollar against the euro) always lowers the expected return on euro deposits. Why is it the case? Explain the economic intuition in full sentences.
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