“US Dollar/USD is the world currency.” This statement is not an exaggeration. Most businesses, government mechanisms, and tourist activities need to know information about the exchange rate between their own currency and the USD.
In the investment world, you should know the USD exchange rate, especially with regard to commodity contracts such as gold and oil, which are priced in US dollars.
The US dollar rate is very important for Forex traders. Most of the traded pairs categorize USD as the base or quote currency (for example, EUR/USD or USD/JPY). Good traders need to monitor the state of the United States economy to identify trends.
One way to profit on Forex is to buy a currency that will appreciate against the USD. Once the value of the currency grows, Forex traders will exchange it for more USD than previously paid. When enough traders expect the value of the currency to go up, this also increases demand and ultimately pushes the currency up in value.
Factors Affecting USD Movement
There are various factors driving the rise of the US dollar, but the main underlying factor is usually the demand for this currency. According to the law of economics, if demand increases, its value also increases. On the other hand, if demand decreases, so does the value.
Increased demand can be caused by an increase in demand from international parties, such as foreign nationals, foreign central banks, or foreign financial institutions. The high demand is also due to the fact that the USD is the world’s reserve currency. Other factors that affect the increase in the value of the US dollar compared to other currencies are the inflation rate, trade deficit, and political stability.
When described sequentially, the increase and decrease in the USD exchange rate as the most popular currency is influenced by the following main factors:
1. Supply and Demand
The first factor that affects the value of the US dollar is the law of supply and demand. The demand for USD is usually higher than for other currencies.
2. Strong Economy
A strong US economy will underpin the value of the USD. In addition, because the dollar is a global currency, the dollar exchange rate actually strengthened during the global crisis. For example, even though the US suffered from the financial crisis in 2008, investors flocked to buy the dollar because it was seen as the safest instrument.
With a strong economy, a country can attract foreign capital to offset trade deficits. This allows the US to continue its role as the consumption engine that drives the world economy, including debtor countries that borrow money for consumption. It also allows other countries to export to the US and maintain their own economic growth.
From the point of view of currency (Forex) trading, when opening a position in dollars, the trader must take into account the various factors that affect its value in order to try to determine the direction of the .
3. Interest Rate
The value of each currency is affected by the interest rate in the respective country. For USD, this means the interest rate paid for the US Treasury. Usually, the lower the interest rate paid, the less demand will be. This allows the US Treasury to pay low-interest rates and still receive a high bid price—meaning the US can run more debt. Other countries have to pay higher yields to renew their debt.
4. Debt to GDP Ratio
A high ratio of national debt to gross domestic product will usually reduce the value of the currency. In this case, the role of the USD as a global currency is a bit dynamic. High US debt doesn’t really affect the dollar when it’s used as a safe haven.
Traders who are close to success are those who follow the development of a number of factors and indicators. This will help us face the competitive and fast-paced world of investment.
Both technical and fundamental factors are equally important. Many traders focus on one, it doesn’t matter. With , you get a broad insight into both.