Draw the graph · Macro · Foreign exchange market
US interest rates rise
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Demand for the currency shifts right. Supply of the currency stays put.
To buy US bonds, European investors must first buy dollars with euros. At every exchange rate they want more dollars than before, so the demand for dollars shifts right. Americans' plans to buy euros have not changed, so the supply of dollars stays put. The exchange rate rises, and a higher price of the dollar in euros is an appreciation.
The dollar appreciates against the euro and more dollars are traded.
Common mistake. Students sometimes shift the supply of dollars left, or shift demand left thinking 'higher rates mean less borrowing.' In the currency market, higher US rates attract foreign buyers of dollars. That is demand.
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Lesson: Trade & Exchange Rates