What does a higher interest rate typically indicate for a country’s currency?

A higher interest rate typically indicates that a country's currency is likely to become stronger or appreciate in value. This occurs because higher interest rates offer better returns on investments denominated in that currency, making it more attractive to foreign investors. When investors seek to invest in assets that yield higher returns, they need to convert their currencies into the local currency where the investment opportunities exist. This demand for the local currency can drive its value up.

In contrast, other options relate to different economic effects of interest rates. A higher interest rate does not weaken the currency's value, lead to depreciation, or necessarily diminish a trade surplus. While trade dynamics can be influenced by interest rates and currency values, the fundamental relationship remains: higher interest rates generally draw in foreign capital, thereby strengthening the currency. Understanding this relationship is vital for assessing the influence of monetary policy on currency valuation in a global context.