The economy’s performance is the decision to buy or sell dollars. A strong economy will attract investment worldwide due to the perceived safety and the ability to achieve an acceptable rate of return on investment. Investors search for the highest yield for their investments especially from other countries and that creates a strong capital account and a resulting high demand for dollars.
On the other hand, American consumption that results in the importing of goods and services from other countries causes dollars to flow out of the country. When a country imports much more accordingly to its exports, they let their money flow out of the country and it makes a deficit in its treasury.
We will cover 3 factors that effect the US dollar;
Supply and Demand Factor
When the US exports something, customers need to buy these goods or services in dollars. So they need to exchange their local money in contrast to dollars. That brings us to the point that how does a demand occur. That makes a pressure on the supply of dollars, increasing the value of the dollar relative to the currencies being sold to buy dollars.
Sentiment and Market Psychology
When the US economy weakens because of the rising unemployment, the US faces the problem of selling the dollar off. Investors want to sell their stocks and bonds to get their local money back which has a bad effect on dollars.
Traders have a task to determine if dollars will be supplied or demanded more. To do that they examine every news that has the potential to impact dollars or the reports and documents that governments release. Also, they follow the behaves in the market to determine the general economic sentiment. Comparatively, economic sentiment drives dollars much more than the supply and demand of dollars. To do this they analyze the historical patterns because these patterns might be profitable to predict the behave of the dollar in the future
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