Inflation increase exchange rate
In other words, higher inflation could cause an exchange rate depreciation, potentially leading to higher import prices (especially if we refer to energy imports) which could also lead to even Interest rates, inflation, and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and changing interest Inflation, Exchange Rates and Stabilization Rudiger Dornbusch. NBER Working Paper No. 1739 (Also Reprint No. r0807) Issued in October 1985 NBER Program(s):International Trade and Investment Program, International Finance and Macroeconomics Program The essay is an extended version of the Frank D. Graham Lecture presented at Princeton University in May 1985.