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Inferring Exchange Rate Expectations
An international investor observes that a one-year government bond in Country A offers a 5% interest rate, while a similar bond in their home country, Country B, offers a 2% interest rate. Assuming the investor considers both bonds to be equally risky and is indifferent between investing in either one, what does this imply about the investor's expectation for the exchange rate between Country A's currency and Country B's currency over the next year? Explain your reasoning.
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