The media frequently reports that the dollar's value strengthened against many currencies in response to the Federal Reserve's plan to increase interest rates. Explain why the dollar's value may change even before the Federal Reserve affects interest rates.

Changes in the federal funds rate can impact the U.S. dollar. When the federal reserve increases the federal funds rate, it typically increases interest rates throughout the economy. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products. The U.S. dollar exchange rate plays a role in inflation. For example, as U.S. exports are sold to Europe, buyers need to convert euros to dollars to make the purchases. If the dollar is strengthening, the higher exchange rate causes Europeans to pay more for U.S. goods based solely on the exchange rate. As. A result, U.S. export sales may decline if the dollar is too strong. (Investopedia, 2022) As the fed funds rate increases, overall rates in the economy rise. If global capital flows are moving into dollar-denominated assets, chasing higher rates of return, the dollar strengthens. (Investopedia)

Tarver, E. (n.d.). How the Fed funds rate hikes affect the US dollar. Investopedia. https://www.investopedia.com/articles/investing/101215/how-fed-fund-rate-hikes-affect-us-dollar.asp