Final answer:
The international Fisher effect suggests that currencies with higher interest rates are expected to depreciate, contrary to the assertion in the question that such currencies will appreciate. The IFE posits that higher interest rates reflect expected inflation, which reduces the currency's future value and offsets the higher returns on interest.
Step-by-step explanation:
The statement that the international Fisher effect (IFE) suggests currencies with relatively high interest rates will appreciate due to increased demand is false. In reality, the IFE holds that currencies with higher interest rates tend to depreciate. This is because higher interest rates often reflect expected inflation, which decreases the future value of a currency. As interest rates in a country rise compared with another country, investors expect to get a higher return on investments denominated in that currency. However, this higher nominal return is expected to be offset by a depreciation of the currency's value due to inflation.
For instance, if interest rates are higher in the United States than in Mexico, investors might be attracted to the higher returns in the U.S. and increase demand for the U.S. dollar. However, according to the IFE, they do this anticipating that the dollar will depreciate against the peso, balancing out the higher interest income with losses from the depreciation, thus expecting no substantial arbitrage opportunity. Thus, the international Fisher effect posits an expected change in the exchange rate that is opposite to what was stated in the question provided.