Exchange Rates Respond to Changes in Relative Prices
The higher price level in the United States makes imports relatively less expensive. U.S. citizens are likely to increase their spending on imports from Britain, shifting the demand for pounds to the right, from D0 to D1.
At the same time, the British see U.S. goods getting more expensive and reduce their demand for exports from the United States. The supply of pounds shifts to the left, from S0 to S1. The result is an increase in the price of pounds.
The pound appreciates, and the dollar is worth less.