What Influences the Value of the U.S. Dollar?

To take advantage of upward and downward movements on currencies, it’s crucial to use foreign exchange brokers such as the well-known online platform, UFX. It enables you to trade on major pairs such as the EUR/USD, minor pairs like the GBP/CAD, and ‘exotics’ such as the USD/SEK, whose availability depends on current levels of liquidity.

The U.S. Dollar (USD) is the most used and traded currency in the world, as confirmed in the last “Triennial Central Bank Survey” from the Bank of Settlement (BIS): “The US Dollar remained the world’s dominant vehicle currency. It was on one side of 88% of all trades in April 2016, up slightly from 87% in April 2013”.

To make sure you are fully prepared to trade the USD, you first need to know what factors influence its value.

#1 Fed Decisions

 Central Banks are the most influential actors in the FOREX market, as they are the ones determining the cost and availability of money in national economies. The US Federal Reserve, known as the Fed, is the U.S. Central Bank, which decides on monetary policy that is applied across the country.

When the Fed tightens its monetary policy by increasing interest rates, reducing quantitative easing programs, etc., it means that the value of the U.S. Dollar is likely to increase. This means that more foreign investors will be attracted to the greenback, as it will provide higher interest rates than those offered in most other developed countries.

 #2 Important Economic Statistics

 Key economic and financial statistics also affect the USD in relation to future Fed decisions. The Fed has a dual mandate of price stability (a PCE index of about 2%) and full employment, meaning a median unemployment rate of about 4.6%, both of which are crucial factors in the country’s growth.

Consequently, figures which demonstrate how close the Fed is to achieving its objectives are seen as vital for investors, as they provide clues about its future decisions. Among the most important to follow are the GDP, the ICP and PCE, the monthly employment report, and the JOLTS.

 #3 Market Sentiment

 Finally, market sentiment and psychology play huge roles in how a currency evolves. If a majority of traders believe that the U.S. President or the Fed Chair is struggling to deliver on their objectives, this often affects growth outlook, making traders more likely to sell the USD and buy other currencies with more potential to generate profit.

When trading the USD, keep these 3 points in mind, stay on top of news announcements, and choose a broker that gives you great market opportunities to take advantage of in order to trade successfully.

Note: Trading requires a very different skill-set to simply investing over the long term, and is much more risky. If you’re interested in learning about investing more generally, you can read other investing articles here on the site)