Overview
The inflation rate that a country experiences, will impact the future value of its currency. Thi will be reflected in both the interest rates that the country experiences, as well as prices that the market trades the currency at in the forward markets.
Inflation and Interest Rates
Given two currencies, we form two variables, {% U_1 %} and {% U_2 %}, where {% U %} is the number of units in the specified currency is required to buy a certain good. The calculation of relative returns shows that
{% 1+r_1 = (1+r_2)\frac{S(T)}{S(t)} = (1+r_2)(1+i) %}
where
{% S(t) = \frac{U_1(t)}{U_2(t)} %}
That is, {% S(t) %} is a measure of relative value of two currencies, that is, how many units of currency 1 is required to buy
the same good as currency 2.
Then, {% i %} measures the relative change in prices of the two currencies.
{% i = \frac{S(T)}{S(t)} - 1 %}
If inflation is known ahead of time (not really realistic, but inflation changes slowly, so maybe a good approximation),
then the above provides a way to price currencies, given the inflation rate {% i %} and the interest rates of each currency.