Suppose US is your home country and Europe is foreign country and you have spare $100 for a year to investment on domestic deposit or Euro deposit

Answer:

Interest rate play an important role in interest rate determination. A higher interest rate means higher rate of return on investment. When the interest rate is comparatively higher in a country then the country attract more foreign investment. Increasing inflow of of foreign investment/capital increase the demand for domestic currency that appreciate the value for the domestic currency and domestic currency get appreciated. When the interest rate is comparatively lower in a country then the country attract less foreign investment. decreasing inflow of of foreign investment/capital decrease the demand for domestic currency that depreciate the value for the domestic currency and domestic currency get depreciated.

According to the question, the US is my home country and Europe is foreign country and you have spare $100 for a year to investment on domestic deposit or Euro deposit. if US interest rate will decline in the near future, but no change in current interest rate then it will decrease the inflow of foreing investment/capital in the USA because of expecting lower rate of return (because of decreased/lower interest rate) in the near future. Decreasing inflow of foreing investment/capital in the USA will decrease the demand for USD and USD will decrease .

Suppose economy is at equilibrium at point "B" where exchange rate is "E0" and quantity demand for the USD is "Q0" . Now because of expected decline in the near future, but no change in current interest rates in the USA will decrease the demand for USD and Demand curve will shift downturn from "D0D0" to "D1D1" where, the exchange rate will depreciate (decrease) from "E0" to "E1" . Here quantity demand for USD will decrease from "Q0" to "Q1".