The value of the USD, the world’s global reserve, is the strongest today, and it is devaluing currencies across the globe. This trend is sometimes unsettling for the international economy as everything right from the profitability of a multinational company to your vacation abroad depends upon the value of the US dollar.
Kavan Choksi is a business and finance expert, and he says that when the USA exports services or products, it creates a demand for US dollars because consumers need to pay for services and goods in dollars. In order to make this payment, they should convert the local currency into USD, and selling their coins to purchase dollars for making the payments does this process.
Besides the above, when the government of the USA or big corporations in America release bonds for raising capital, foreign investors, whose payments should be made in US dollars, later buy it. The same principle applies to the purchase of corporate stocks in the USA from investors from other nations. They need the foreign investor to sell their local currency to purchase dollars for buying those stocks.
The above are some examples that display how the USA creates a demand for dollars, and this, in turn, places pressure on its supply, thereby increasing the value of the US dollar against the currencies sold for buying dollars.
In addition to the above, the US dollar is considered to be a safe bet during global uncertainty in the economy, so the demand for it continues despite market fluctuations in the US economy’s performance.
Market psychology and sentiment of the value of the dollar
If the economy of the USA becomes weak and consumption slows down due to rising unemployment, the USA, for example, is faced with a potential sell-off that could result from the return of the cash from the sale of stocks/bonds to return to the local currency. When the foreign investor buys back the local currency, this has a dampening effect on the US dollar.
The Value of the US Dollar is also affected by technical factors
Traders are responsible for evaluating the dollar supply to check whether it is greater or lesser than its demand. To determine the above, one needs to pay attention to the events or the news that might influence the value of the dollar. This will include the issue of different government statistics like GDP data, payroll data, and other information about the economy that will help you determine the levels of weakness and strength in the economy.
Kavan Choksi adds that one also needs to incorporate the perspective of the other market players like asset management firms and investment banks to gauge the economic sentiment generally. Sentiment often drives the market over economic fundamentals like the principle of supply and demand. Besides this, traders are given the responsibility of analyzing historical trends and patterns linked to seasonal factors like resistance and support levels and technical indicators. Several traders in the market believe that the above ways are cyclical and can be used to predict price movements in the future.