What effect do rising interest rates have on foreign exchange values?

Rising interest rates typically lead to an increase in the value of a country’s currency, such as the USD. When interest rates rise, it often results in higher returns on investments denominated in that currency. As a result, this attracts foreign capital as investors seek higher yields. The increased demand for the currency to invest in these higher-yielding assets leads to an appreciation of that currency's value.

For example, if the Federal Reserve increases interest rates, investors around the world may need to purchase USD to invest in U.S. bonds or savings accounts offering these higher returns, thereby increasing the demand for USD in the foreign exchange market. This mechanism tends to strengthen the currency against others.

In the context of the other options, they do not accurately reflect the relationship between interest rates and currency values. A decrease in the value of USD would suggest that higher interest rates do not attract investors, which is contrary to economic principles. No impact on currency values contradicts the established link between interest rates and investment attractiveness. Making foreign currencies more attractive would imply that higher interest rates in one country would weaken that currency, which does not align with typical market behavior where higher rates usually bolster the domestic currency.