It all boils down to how the economy is performing when it comes to the decision of whether to sell or buy the United States Dollars. Generally, a strong economy will normally attract financial (and otherwise) investment from all over the globe due to the perceived safety and the ability to effortlessly achieve an acceptable rate of return on investment (ROI). Investors and forex traders always seek out the highest yield that is “safe” and predictable. Investment from abroad generates a strong capital account and a resulting high demand for U.S dollars.
However, consumption of goods and services by the United States of America through Importing from other countries causes the U.S Dollars to flow out of the country. If the exports are lesser than the imports, there will be deficient in the current account. With a very strong economy, a country can attract significant foreign investment and capital to offset the trade deficit. The United States can therefore continue as the global consumption engine that fuels the world economies despite the fact that it is a debtor nation that borrows much of the money to consume. While most major currencies in the world often groove to the tune of country-specific fundamentals, the United States Dollar can be a little more fickle as it sometimes dances to a different beat.
Factors Affecting Dollar Value
When it comes to the point of taking a position in the U.S dollar, the forex trader and investor need to carefully assess the different factors that affect the value of the U.S dollar to try to accurately determine a trend or direction. The methodology can be divided into three main groups as follows:
• Technical factors
• Supply and demand factors
• Sentiment and market psychology
As forex traders and investors, we have to always gauge whether the demand of dollars will be lesser or greater than the supply for dollars. To help us accurately determine this, we need to pay close attention to various event items and news, such as the release by the government of various statistics like, GDP data, payroll data, and other important market and economy measuring data that can help us to conclusively determine what is happening in the economy and to estimate whether the economy is weakening or strengthening.
Additionally, we also need to determine the overall sentiment regarding what the market players think the outcome of events is going to be. Sometimes, sentiment drives the market rather than the fundamentals of demand and supply. To add to this mix of prognostication, besides the