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The Fisher International effect states that the difference between the interest rates of two countries will directly affect the exchange rate between those two currencies. In this hypothesis, the value of the currency with the lower nominal interest rate will increase due to the higher rate of the other country.

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The IFE provides for the assumption that countries with lower interest rates are likely to have lower levels of inflation, which may lead to increases in the real value of the related currency compared to other nations. In contrast, nations with higher interest rates will suffer a depreciation in the value of their currency.

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The IFE is based on the analysis of interest rates associated with current and future risk-free investments, such as Funds, and is used to predict currency movements. This is in contrast to other methods that only use inflation rates to predict changes in exchange rates and instead serve as a combined view of inflation and interest rates with currency appreciation or depreciation.

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The Fisher effect is crucial to understanding the changes in the nominal interest rate over time, as it establishes that the nominal interest rate adjusts for expected inflation. So that the real interest rate is not affected, the nominal interest rate is adjusted to take into account changes in the inflation rate. Thus, the relationship would be as follows. If central banks raise the growth rate of money, the long-term result would be both an increase in the inflation rate and a rise in nominal interest rates.

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The Fisher effect demonstrates how the money supply influences the inflation rate and the nominal interest rate together. For example, when monetary policy is changed in a way that increases the inflation rate by 5 percent, the result is that the nominal interest rate also increases by the same percentage.

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For example, if country A's interest rate is 10% and country B's interest rate is 5%, country B's currency should appreciate by about 5% compared to country A's currency. The rationale behind the IFE is that a country with a higher interest rate will also have a higher inflation rate. This higher amount of inflation should cause the currency of the country with a higher interest rate to depreciate against a country with lower interest rates.