If interest rates in other countries remain unchanged, then an increase in the U.S. interest rate will lead to an appreciation of the dollar.

Question

Quizplus · Accepted Answer

When U.S. interest rates increase, it becomes more attractive for foreign investors to hold U.S. dollar-denominated assets, which increases demand for dollars and leads to an appreciation of the currency. If interest rates in other countries remain unchanged, then there is no change in the attractiveness of their currencies, so investors are more likely to invest in the U.S., leading to a higher demand for dollars and appreciation of the currency.

If Interest Rates in Other Countries Remain Unchanged, Then an Increase