How does high inflation typically affect currency exchange rates?

High inflation typically leads to currency depreciation because it erodes the purchasing power of the currency. When inflation is high, the cost of goods and services increases, meaning that consumers can buy less with the same amount of money. This decline in purchasing power impacts investors' confidence in the currency. As a result, demand for that currency tends to decrease in the foreign exchange market, leading to depreciation against other currencies.

In the context of international trade and investment, if a country experiences high inflation while others do not, its exports may become less competitive due to higher prices, further reducing demand for its currency. Therefore, currency depreciation becomes a natural outcome of sustained high inflation, making this understanding essential for analyzing currency exchange rates.