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News.com.au  2 hrs ago  Comment 
THE Australian dollar is higher, boosted by a gain in the iron ore price and a weaker greenback.
newratings.com  9 hrs ago  Comment 
BRUSSELS (dpa-AFX) - The New Zealand dollar continued to trade in positive territory against the U.S. dollar and the euro in New York trading on Monday. The kiwi climbed to a 4-day high of 0.7976 against the greenback, while reaching 1.6016 per...
newratings.com  Oct 20  Comment 
LONDON (dpa-AFX) - The U.S. dollar drifted lower against the pound in European deals on Monday. The greenback hit 1.6147 against the pound, its lowest since October 9, and was 0.4 percent lower from Friday's closing quote of 1.6086. If the...
newratings.com  Oct 20  Comment 
BRUSSELS (dpa-AFX) - Retreating from early highs, the euro edged down against most major currencies in early European deals on Monday. The euro declined to 4-day lows of 1.2730 against the greenback and 1.2061 against the franc, reversing from an...
newratings.com  Oct 20  Comment 
STOCKHOLM (dpa-AFX) - The Swedish krona weakened against the U.S. dollar ahead of European session on Monday. Against the greenback, the krona fell to a 4-day low of 7.1967 from an early high of 7.1734. At last week's close, the krona was...
Financial Times  Oct 19  Comment 
Coinfloor to trade in US dollars, euros and Polish zloty to escape UK institutions’ limitations
SeekingAlpha  Oct 19  Comment 
By Marc Chandler: After wild swings at midweek (October 15), the US dollar spent the last two sessions of the week consolidating. While we expect the Federal Reserve will not be distracted by the recent market turmoil, or the softening of some...
The Economic Times  Oct 18  Comment 
The group develops artificial intelligence for algorithms which are used to trade the foreign exchange, gold, crude oil and shares automatically without traders.
SeekingAlpha  Oct 17  Comment 
By Dean Popplewell: By Alfonso Esparza One of the expected drivers of a US Economic recovery are consumers. In a week that will live down in history based on the size of the correction the US retail sales came in at -0.3% not a disaster in...
SeekingAlpha  Oct 17  Comment 
By Safety In Value: Northern Offshore (OTCPK:NFSHF) is an offshore drilling company headquartered in Houston. The company has its primary stock market listing in Norway, but it reports in US dollars. The company's stock price has been severely...




 

This article is about the U.S Dollar Currency. You may also be looking for ETF ProShares Ultra Semiconductors (USD).

The U.S. dollar (USD) (also known as the Greenback or Buck[1]) is the official currency used in the United States of America. 85% of all currency transactions across the world involve the US dollar. It is the world's primary reserve currency and 25 different currencies are pegged to the US dollar.

The dollar's value refers to the purchasing power of the dollar versus other currencies, or the exchange rate between the two currencies. When the dollar is strong, foreign goods are relatively less expensive. This can benefit businesses that import raw materials or manufactured goods into the United states, such as Wal-Mart Stores (WMT). A weakening dollar benefits companies with foreign competitors, such as US Steel (X), as their competitors' goods become more expensive. A weakening dollar can also lead to rising interest rates, as investors require higher rates to compensate for the added currency risk. Higher interest rates, in turn, have significant consequences for the housing market and business investment in general. A strong dollar means lower oil prices, as the US purchase much of its oil abroad. As the dollar weakens oil producers charge more to protect their margins.

The chart at left shows the exchange rate between the US Dollar and the Euro (EUR) - specifically, this chart is the number of Dollars per 1 Euro.

Companies that benefit from a rising dollar

  • Companies that export goods to the United States will benefit from a stronger dollar. This is because a strong dollar makes foreign goods relatively inexpensive and so increase US imports. This applies to companies like Volkswagen and dragons(DCX) and EADS NV which all sell foreign cars and airplanes to the US.
  • Companies using foreign goods extensively as inputs or for retail will also benefit from a rising dollar. This means that companies like Wal-Mart benefit from a stronger dollar as it makes it goods that they buy in China and sell in the U.S. relatively cheap.

Companies that benefit from a falling dollar

  • As the dollar falls, US exports become relatively less expensive; therefore making them more attractive to foreign investors and consumers. This means that companies like Boeing, 3M Company (MMM) and other exporters which sells a substantial portion of its products to foreign customers stand to benefit.
  • Advanced Medical Optics (EYE), which gets a large portion of its revenues from outside of the United States, benefits from a falling dollar, which makes its exports more competitive.

Factors affecting the dollar

Trade Deficit

Trade deficits lead to a net outflow of a country's currency. Countries on the other side of the transaction will typically sell the importing country's currency on the open market. As supply of the country's currency increases in the global market the currency depreciates. As a net importer, the US has seen its trade deficit grow rapidly. This trade deficit weakens the US dollar relative to other currencies since forein goods are denominated in foreign currency, thus demand for foreign goods increases the demand for foreign currency and decreases the demand for US dollars. This causes the US dollar to depreciate.[2]

Budget Deficit

When a country's government spends more than it earns from taxes or other sources of revenues, it is forced to borrow from its citizens and/or from foreign entities. As a country's debt load increases, the value of its currency may decrease as result of fears within the international community over its ability to repay the debt. In addition, by borrowing money from foreign countries, the US increases the demand for foreign currency in exchange for US Bonds. This lowers the relative value of the dollar.[3]

China, Japan,Russia may stop holding large US Dollar Reserves

Countries like Japan and China are large purchasers of US debt. China in particular has exhibited a voracious appetite for US debt. Its rapidly growing economy is heavily dependent on exports, and the US is one of its largest trading partners. In any given year, the US imports much more from China than it exports to China. As a result there is a net flow of dollars to China. Normally, one might expect China to sell these dollars on the global market, causing the dollar to weaken. Instead China reinvests its dollars in US debt. In doing so, China strengthens the US dollar and limits the appreciation of its own currency. As a result Chinese exports remain cheap to American consumers.

However, due to large deficits many countries, China, Russia and India in particular, have begun to reconsider diversifying their reserves to protect themselves from a devaluation of the US Dollar. The decision of these large countries to shift increasingly towards Gold as a reserve currency greatly decreases the demand for US Dollars and weakens the USD.[4]

Technology, Production & Investment

The level of technology and production which a country has relative to other countries alters the exchange rates. Countries which are able to produce relatively well and/or have high levels of technology increase the demand for domestic investment and domestic goods. This rise in demand for both capital and goods strengthens the currency and the exchange rate. Thus, when the US is seen as a technological and production leader, high investment and purchasing rates keeps the US dollar relatively strong.[5]

Forex Markets [1]

Most Active Currency Pairs and Trading Hours

The most active USD trading hours are from London's opening market hours (2:00AM ET / 6:00 GMT) due to London's strength in international markets and the typical time of release for U.S. Economic news (8:30AM ET/ 12:30 GMT).[1]

Factors that affect the U.S Dollar when trading

  • 1. Interest Rates are very important for the Dollar. Take a look at how USD/JPY tracks the 3 Month LIBOR rate for the U.S.
  • 2. Many Commodities are priced in Dollars, so when the dollar rises, commodity prices fall.
  • 3. Dollar strength or weakness frequently dominate the currency market on one given day, so know the risks of correlated positions!

The U.S. Economy

Key Facts

Because the US Dollar is used more extensively in the United States, the US economy has a particular effect on the dollar. The demand and breakdown of goods in the United States effects the demand for the dollar and so its relative value.

Market Moving Economic Releases

The market and the US Dollar are particularly effected by each of the following economic activities to varying degrees:

  1. The Federal Reserves Rates
  2. Retail Sales
  3. Consumer and Producer Prices
  4. Nonfarm Payroll (NFP)
  5. Gross Domestic Product (GDP)
  6. Trade Balance
  7. Consumer Confidence Reports
  8. Service and Manufacturing ISM

The Federal Reserve's control over the dollar

The U.S. Federal Reserve is the U.S. central bank responsible for determining what is arguably the most important variable defining forex trends and currency values: the main interest rate. Established in 1907 in response to a particularly severe banking crisis with bankruns and many failures, the institution was further strengthened with successive legislations, and made independent in 1913, and as such, its decisions do not need the approval of the Congress, the President, or any other authority. After the U.S. abandoned the gold standard in 1971, it acquired even greater influence and power under the successive administrations of Paul Volcker and Alan Greenspan.

Federal Reserve Rates

The Federal Reserve sets its main rate during meeting of the FOMC which are always anticipated with great excitement by market participants and the news media.

Federal Funds Rate

As part of the fractional reserve system, banks are required by law to hold a percentage amount as a deposit with the Federal Reserve to ensure liquidity in the system, and as an implicit sign that they are solvent. The Fed’s main rate, the Fed Funds Rate, is the interest rate at which banks are expected to trade these deposits among themselves. This is also the main rate which markets devote great attention to, since it is the cheapest money in the economy in terms of interest rates. The lower it is, the easier it is to pay loans, and the greater risk tolerance of borrowers.

Reserve Requirements

The reserve requirement is another way of controlling the amount of credit available to the private sector. It is a somewhat more blunt tool in comparison to open-market operations, since it influences many financial institutions at the same time. As such it is used less often than the main tool and when used it is for purposes other than the management of liquidity.

References

  1. 1.0 1.1 1.2 FX360.com, USD Factsheet by Kathy Lien
  2. [http://www.census.gov/foreign-trade/balance/c0015.html#2008 U.S. Census Bureau, Foreign Trade Division "Trade with World, Not Seasonally Adjusted
  3. Deficits Do Matter "National Debt" 17 Nov 2009
  4. Globe Investor "Golden sale heralds economic force" 4 Nov 2009
  5. Landon, Stuart - Journal of International Money and Finance: "Investment and the exchange rate: Short run and long run aggregate and sector-level estimates"
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