Is it possible to predict what will happen to the exchange rate when the unemployment goes down? if so, how does it happen?
The reduction in unemployment could tempt the government to raise the interest rate, or at least they won’t reduce the interest rate, if it is already high. When this happens the currency of that country could appreciate against other currencies.
There is another effect. If unemployment goes down, which means more are employed, and thus the general income level of the people goes up, which means they may be demanding for imported goods, in which case the demand for foreign currencies goes up and thus the currency of the country could depreciate.