This above equation shows that if the foreign real rate of interest is not greater than United States rate of real interest, we should expect the depreciation in real exchange rate. In this higher US rate of real interest will be offset by the depreciation of expected real rate of exchange. And it also makes foreign real return equals to the US real return. Hence we can say that the variations in the real rates on interest in the two nations are directly related to the expected appreciation or depreciation of dollar. If there is an appreciation in US real rate of interest there will be an increase in real and nominal exchange rates. People will get attracted to United States’ assets if there is increase in higher U.S. real interest rate. Attractiveness of assets increases the demand for dollar and it causes increase in the real exchange rate of real exchange. And it also leads to the increase in nominal exchange rates.