Final answer:
Rising U.S. interest rates typically result in a stronger U.S. dollar, increased demand for dollars due to attractive rates for foreign investors, and a decrease in U.S. exports due to the higher cost for foreign buyers.
Step-by-step explanation:
When U.S. interest rates rise compared to the rest of the world, it typically leads to an appreciation of the U.S. dollar. Higher interest rates make U.S. financial assets more attractive to foreign investors, increasing the demand for dollars as they require the currency to purchase these assets. Consequently, there is a decrease in the supply of dollars in the foreign exchange market because Americans find U.S.-denominated assets more appealing and reduce their investments in foreign assets.
The more valuable dollar makes U.S. exports more expensive for foreign buyers, potentially leading to a decrease in exports. On the other hand, imports become relatively cheaper for U.S. consumers, which may increase import levels. This dynamic can lead to a trade deficit, whereby the value of a country's imports exceeds the value of its exports.