1. Introduction
In the Current episode of the Global financial turmoil, much of the importance is given to highlight its causes, find relationship between different macro-economic variables of major economies and uncover the solution that can sustain the growth of the world economy. For this purpose, people from different corners of the globe have produced much of the thought provoking literature including working-papers and research papers.
All the macro-economic indicators that include inflation, un-employment rate, purchasing power parities, GDP, interest rate, trade balance, national income, industrialization, exchange rate etc. are good indicators of the national economy but in this current episode of recession when the world has entered into a global arena, it's very important to find out the relationship between these macro-economic variables. The focus of this research paper is to find out a relationship between interest rate and exchange rate of Pakistan and U.S. and find the impact of interest rate on exchange rate of the countries, under discussion.
Interest rate is a very important element in country's economic growth whereas exchange rate is a critical element of the global trade and major factor in country's sustainable economic growth. The U.S. Dollar exchange rate for different currencies showed variations for example; U.S dollar was depreciating against Euro and U.K. pound sterling but was appreciating against Pakistani rupee. Pakistani rupee was devaluated against dollar by 38% in just 26months1. In the same time, interest rate in U.S. reached to its lowest but in Pakistan it reduced to 13% which is 260 times more than interest rate in U.S. (Nov. 09, 0.05%). In the world, Pakistan has the hig
