Let me give an example to support this statement:

According to law of one price, there are various arbitrage behaviors in the market. Although this arbitrage behavior does not directly create value in essence, it is of great significance. A large number of arbitrage behaviors push the market closer to the "no arbitrage opportunity" market, which is the prerequisite for the market to achieve equilibrium. ?

Specifically, this logic can be established in a general way: suppose the interest rate of the US dollar is 1.50%, the interest rate of the Euro is 0%, the spot exchange rate of the Euro against the US dollar is 1.2300, and the forward exchange rate of the Euro against the US dollar is 1% relative to the spot exchange rate. Then the nominal interest margin is 1.50% and the net interest margin is 0.50%, so there is an arbitrage opportunity. You can convert the euro into US dollars immediately, deposit it in the bank, and buy 1 year forward euro, enjoy the interest rate of US dollars before maturity, and convert it into euros after maturity according to the previous forward price with interest, so as to realize "risk-free" net profit. Risk-free here means not considering inflation.

Continue to extend according to the assumption in Example 2, assuming that the euro interest rate rises by 25 basis points to the level of 0.25%. The nominal spread between the euro and the dollar has narrowed, which reduces the arbitrage space of the original arbitrage model, so the original arbitrage behavior of converting euros into dollars in spot and then buying forward euros will be reduced. In other words, at least in the spot market, capital is likely to flow into the euro more, so the exchange rate of the euro is likely to be pushed up.

Let me briefly talk about those who don't support this statement:

The liquidity of the foreign exchange market is very large, and the trading volume is even more amazing, so that unforeseen situations occur from time to time. But no matter how special the situation is, it always follows some basic principles and principles in economics and finance.

For example, during some regional financial crises, especially when the currency market crashes, the central bank often raises the target interest rate in an attempt to alleviate the pressure of currency depreciation, but sometimes it has little effect. For example, the collapse of 1992 and the Italian lira; Another example is the collapse of Thai baht 1997; And the Russian ruble has plummeted several times in recent years. The central bank saved its currency at all costs and provided various financial instruments, including raising interest rates, but it still drew water with nothing.

This seems inconsistent with the arbitrage inertia mentioned above. In some special cases, pure interest margin can't attract arbitrage capital. Because although the essence of capital is profit-seeking, it is also risk-averse. These two attributes are contradictory, but they are also inseparable.