5 Factors That Affect the U.S. Dollar

by Andrew McGuinness     Jul 16, 2019

The strength of the US dollar is perhaps one of the most critical elements that drives the world economy. Understanding what factors affect the dollar’s strength is an important part of predicting how the world ecnomy runs and evolves. There are a number of factors that can hurt or cultivate the value of the US dollar. For example:

1) The Trade Balance Report

The US Census Bureau and the Bureau of Economic Analysis (BEA) work together to produce the trade balance report, which helps analysts understand the latest export and import activity going on in the US. The Trade Balance Report includes the nominal trade deficit indicator. Simply put, this is the number which shows the dollar’s current value in U.S. exports against U.S. imports. If exports become lesser in value than imports, this will create a trade deficit; a trade surplus occurs when exports have more value than imports.

When a trade deficit is declared, the U.S. dollar generally lessens in value. This is because it signifies that foreign goods have a higher demand than American goods; these goods are bought with a foreign currency, raising the demand for non-US dollar currencies. Trade surpluses strengthen the dollar, as it raises the dollar’s demand.

2) Retail Sales

Retail sales is calculated as a measurement of the overall sales of American retail goods over a certain period of time. With weak sales, this implies a weaker economy; strong sales imply a stronger economy. Like what is shown in the trade balance report, the retail sales finding can either help to weaken or strengthen the dollar.

This report is created every month by the Department of Commerce and the Census Bureau, and it can strengthen or weaken the dollar by showing analysts whether the economy is in a healthy or unhealthy place.

3) GDP

The GDP, or Gross Domestic Product, is the measurement which notes the monetary value of all services and goods created and offered within a country over a certain period of time. This overall number is considered one of the most transparent indicators of a country’s economic health. When the GDP of a country rises, interest rates are expected to rise; with rising interest rates, foreign investors are attracted and the dollar is further strengthened. However, if the GDP begins to fall, the dollar will fall as well.

4) Inflation and Interest

The value of the U.S. dollar is directly affected by the market’s inflation. A lower inflation rate can indicate that the value of your goods as well as your trade with the global market is increasing at a slow but steady rate. There is also a direct link between inflation and interest rates; if the interest rate in a country is high, the country’s currency is strengthened, as it can bring in foreign investment.

Inflation and interest are also indirectly linked to the image your country has to the rest of the world. International relations and foreign policies are huge factors when it comes to creating the country’s worldwide image, and if the overall image is negative, the currency is usually negatively affected.

5) Supply and Demand

Supply and demand is economics 101, but its relevance in terms of affecting the value of the U.S. dollar is insurmountable. Simply put, the more other countries want to trade with the U.S., the higher the demand for the U.S. dollar. To purchase US goods, other countries must first exchange their currency into USD, and the more countries that are buying our goods, the higher the dollar rises.

Determining the U.S. Dollar’s Value

There are more than five factors that affect how strong or weak the U.S. dollar is perceived at any given time. What’s important to remember is that while it may also fluctuate, it is a relatively stable currency, which is what drives the trust behind it.

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