Currency risk premiums influenced by interest rates and exchange rates equilibrium.
Currency risk premiums are influenced by interest rate differences and the gap between current exchange rates and their long-term equilibrium. Speculators and non-speculating traders play a role in this. If speculators have other options besides currency speculation, uncovered interest rate parity may not hold. Changes in exchange rates can be negatively related to interest rate differentials, which is common in foreign exchange markets.