The US dollar is the most popular currency worldwide. Its rate is affected by several key factors. Here is an overview of these correlations.
US Dollar Rate and the Four Factors That Affect It
No other currency beats the US Dollar. It is used for most international transactions. Travelers and traders exchange other currencies to USD and back. The American dollar is the world’s key reserve currency, which is why it is less vulnerable to the typical causes of depreciation. Discover four factors that can influence the rate of USD against other currencies.
Activity on the Foreign Exchange
The Forex market is accessed by institutions and individuals. Employees of large businesses are tasked with hedging their companies’ exposure to volatility. Negative currency risk is a reality for any international business. They may import supplies, have offices abroad, or export to foreign markets. Changes in the exchange rate may eat a sizable chunk of revenue unless hedging is used.
The value of the U.S dollar is a crucial factor in Forex. Most traded pairs include it as either the base or the quote currency (e.g., EUR/USD or USD/ZAR). The trader needs to monitor the health of the American economy to predict trends in foreign exchange.
They may capitalize on both rises and falls of the USD. Suppose it is expected to depreciate against another currency. A trader may sell the former, getting more dollars in return. If appreciation is expected, more US dollars are bought, which makes the currency more expensive due to higher demand.
Another way to profit is through carrying trades. This is based on the difference between interest rates. Traders invest in economies with high interest using currency they borrow cheaply. This was done with the Japanese yen. For years, the Bank of Japan was interested in keeping its value low, so local manufacturers could have competitive prices.
This is the same market you can access through a terminal like MetaTrader 4. Global brands like Forextime provide brokerage services in many countries. Learn the basics of Forex investment in India and you will be able to trade on your own or invite a strategy manager. With a live trading account, one may benefit from the dynamics of the US dollar. All they need is the right software, knowledge, and brokerage. So, what factors should you look out for?
1. Supply and Demand
The US dollar gains or loses value depending on two factors: how much money is in circulation, and how high the demand for it is. Supply and demand are intertwined, which is a fundamental law of economics.
As the dollar is the biggest reserve currency, it is in high demand by default. Therefore, the government can sell more Treasury notes than other nations. These Treasuries offer modest returns, but they are still attractive. The state thereby increases supply without having to pay high interest. This fiscal stimulus supported the economy prior to the 2008 crisis.
2. Strength of the Economy
The stronger the national economy is – the more robust its currency is. Therefore, when the American system is thriving, the dollar rate shoots up. It also does well during a global crisis.
Even in 2008, when the reckless behavior of investors triggered the mortgage collapse, the dollar was strong. It was seen as a safe haven in times of turmoil. Later, the currency gained value during the summers of 2011 and 2012. This time, investors flocked to the USD away from the Euro due to the Eurozone debt controversies.
3. Interest Rates
Any world currency is affected by the interest rate within the issuing country. For the US dollar, the crucial factor is interest paid on US Treasuries. The lower it is – the less attractive the security and the lower the demand. This is a theory.
However, since the American currency is a safe haven, even low interest attracts investment. This is exactly what allows the country to accumulate such colossal debt. When other countries need to attract capital, they have to offer higher returns.
4. Debt to GDP Ratio
Gross domestic product is a vital indicator reflecting the health of the national economy. Its relation to state liabilities can drive the currency value up or down. The higher the debt in comparison to GDP – the weaker the US dollar.
It was especially salient before 2008 when the dollar fell as the debt inflated. Today, this is mitigated as the dollar is the number one currency worldwide. Its status as a safe haven softens the negative effect.
Take Advantage of the USD Rate
These are the four most important factors for the health of the US currency. An online trader from India may buy and sell dollars for profit. Trading software facilitates market analysis, and both rises and falls can be lucrative. Those who understand the market can turn their knowledge into cash.
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Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.
