We are going to discuss the 10 things that cause the value of the United States dollar to rise or fall.
However, we will first talk about the role of the United States dollar in the world economy. For instance, in Nigeria, the exchange rate of dollar to naira black market is very high because of economic crises and other factors in the country.
What is the role of the U.S. dollar in the global economy?
The United States dollar is unarguably the most influential currency in the world and this explains why the United States economy keeps blossoming.
Any rise or fall of the U.S. dollar affects other currencies as well as the economy of other countries. The U.S. dollar tops the list of currencies in the foreign exchange market.
International traders are always observing the movement of the United States dollar to enable them know what and when to buy goods or stocks.
Currency depreciation in the U.S. dollar context means when the value or rate or the dollar against other currencies reduces, while currency appreciation in the context of the U.S. dollar refers to a rise in the value and rate of the dollar against other currencies.
If for example, one U.S. dollar changes for one British pound, we can describe the currencies as being at parity. If exchange rate changes and one U.S. dollar changes for 0.85 British pound, we can say that the U.S. dollar has depreciated against the British pound and lost its value relative to its British counterpart.
Let’s now talk about the 10 things that cause the value of the U.S. dollar to rise or fall. There are lots of economic factors that can contribute to the appreciating or depreciating of the U.S. dollar.
10 Things That Cause The Value Of The U.S. Dollar To Rise Or Fall
- Monetary Policy
The United States central bank called ‘Federal Reserve’, or ‘Fed’, usually implements monetary policies to decrease or increase interest rates in the country. If the Fed lowers interest rates, it may compel investors to transfer their investment out of the United States and go to another country offering higher interest rates. Once this happens, the U.S. dollar will become weak against the currencies of the countries offering higher interest rates.
- Currency Demand
The more other countries demand for the United States dollar, the more it rises. A demand for the dollar boosts it strength. The United State imports more than it exports, this would have naturally meant that the global demand for the dollar will be little. However, the U.S. government created artificial demand for the dollar by making it a reserve currency. This means that the United States dollar is usedby other global nations for purchases of commodities like gold and oil.
As the people selling the oil and gold demand payment in the United States dollar being a reserve currency, it creates an artificial demand for the dollar, this makes the dollar to keep rising.
Inflation is when the cost of goods and services rises in a country, when inflation occurs, the value of the country’s currency depreciates, and vice versa. When the prices of these goods and services are rising, other nations may not be able to purchase them and this will decrease demand. A decrease in demand will weaken the value of the United States dollar.
- Falling Export Prices
The United States dollar falls when the price of an important and vital export product fall. Once this happens, the dollar will depreciate. When the price of this key product rises, the dollar will also rise.
- Slowing Growth
When the economy of the United States is strong, the dollar will also be strong, when the economy is weak, it weakens to dollar as well. A decline in growth and corporate profits will force investors to take their investments to another country. If the number of investors in the American economy reduces, the value of the U.S. dollar will likely reduce.
- Performance of Other Currencies in the dollar index
If the other currencies in the dollar index, (i.e. British Pound, Canadian Dollar, Swiss Franc, Euro, Japanese Yen, and Swedish Krona) decline in value, it can propel the dollar upwards, if there is a surge in any of the currencies, the dollar will be scurrying.
- Sentiment and Market Psychology
When the economy of the United States get weak due to factors like unemployment, consumption slows down. This may force the U.S. to sell-off, that is to return the cash for bond and stock sales so as to return to their local currency. The United States dollar will be heavily affected when foreign investors buy back their local currencies.
- Government Actions and Policies
Several actions of the United States government have direct impact in the value of the United States dollar. When the government behave responsibly and make right decisions and policies, the dollar appreciates. Also, if they make wrong decisions and do not behave responsibly, it affects the U.S. dollar negatively.
- Political Instability in Other Major Countries
The United States dollar increases in value and rate when there is political instability in major currency countries. Their currencies decrease in value and this helps the dollars to grow stronger. For example, political instability in the European Union weakened the strength of the euro and this has made the dollar to keep getting stronger today. Whenever euro or other major currencies getweaker, the dollar gets stronger, and vice versa.
What causes the values of the U.S. dollar to rise or fall?
Like we have listed above, factors like inflation, currency demand, government actions and policies, Sentiment and market psychology, slowing growth, monetary policy, etc. have direct effects on the value of the United States dollar. Any of these factors listed above can decrease or increase the value of the U.S. dollar.