High interest rates are commonly expected to strengthen a country's currency because they can encourage foreign investment in securities in that country, which results in the exchange of other currencies for that currency. Yet, the peso's value has declined against the dollar over most years even though Mexican interest rates are typically much higher than U.S. interest rates. Thus, it appears that the high Mexican interest rates do not attract substantial U.S. investment in Mexico's securities. Why do you think U.S. investors do not try to capitalize on the high interest rates in Mexico?

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There are several reasons why high Mexican interest rates might not attract substantial USinvestmentdespite the apparent benefit 1 Inflation Expectations While Mexican interest rates are higher inflation in Mexico is also typically higher than in the US Investors consider real interest rates which account for inflationIf the expected inflation in Mexico offsets the high nominal interest ratethe actual return for investors might be negligible or even negative 2 Currency Risk The pesos devaluation against the dollar erodes the potential gains from higher interest rates Even if the investment ... View the full answer