What Affects the Value of the Dollar?

A country’s economic stability, growth or failure largely depends on the value of their currency.  There are several important factors that affect the value of currency, yet what are the most important things to look at if you’re evaluating your country’s economic well-being?  I recently came across an article that lists the four factors that affect the value of currency, specifically the US dollar, listed below:

supply vs demand

1. Supply & Demand: When other countries want to buy products or services from the US, there’s a demand created for that currency.  Whoever the buyer is will have to purchase those goods and services with the US dollar, therefore they end up exchanging their own currency.  In effect, this means that they’re buying US dollars.  The host country, in this case the United States, receives benefits from more than one route, since this transaction is usually conducted in the form of bonds issued by various corporations.

Investment

2. Trade & Investment: Analysts tend to mark this part of the economy as the most influential aspect to to dollar’s value.  A balanced trade will represent the difference between the imports and exports of the US, and exports are hopefully higher than imports.  This is called a surplus; when the numbers are reversed, then it becomes a deficit.

Inflation of dollar

3. Inflation & Interest: When the market’s inflation changes, the value of your currency exchange rates does as well.  If you have a lower inflation rate, the prices of your goods and exchanging them with other countries will increase at a slow but steady rate.  Interest rates and inflation are directly linked; if a country maintains higher interest rates, then it actually boosts the value of that country’s currency by drawing in foreign capital.

Uncle Sam US vs world

4. Sentiment & Philosophy: The way that the rest of the world views a country, the sentiment induced at the suggestion of exchange and international relations all matter a whole lot.  If a country views the US as “weak”, and think the American economy is struggling, then they could sell back their bonds.  This is a bad return process, that proves bad for business.  Therefore, financial relationships and history are both important in regards to the country’s level of financial competency.  Trade relations need to be nurtured and treated with the utmost respect.