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What happens in the foreign exchange market if the U.S. interest rate increases? What is the...

What happens in the foreign exchange market if the U.S. interest rate increases? What is the effect on the exchange rate?

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Higher interest rate in US will make US a more attractive investment destination ceteris paribus. Inflow of foreign capital in US will increase, which will increase the demand for dollars and decrease the demand for foreign currencies. As a result, demand curve for dollars will shift rightward, increasing the value of dollar and quantity of dollars traded in foreign exchange market. Dollar will appreciate and foreign currencies will depreciate, increasing the exchange rate.

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