Factors Effecting Currencies - Capital Markets

The U.S. dollar, which is known as the global reserve currency, is affected by a range of factors, and the Capital Markets are some of them. The capital markets are the basis of the US economy and the most liquid in the world. That depth and efficiency is demonstrated by the size of the U.S Gross Domestic Product, the power of the US industrial sector, the level of home ownership and the huge national infrastructure across the fifty states relative to the rest of the world. American stocks, bonds or any other investments are recognized worldwide, and the performance of these capital markets can either increase or reduce foreign investment, that in result directly influences the value of the US dollar.

Let’s take a closer look on how the US Capital Markets can affect the USD:

Bull Markets

In the bullish market, the economy is doing well, the unemployment is declining, GDP is rising, and prices are also growing. This market is characterized by optimism, high expectations, and investor’s confidence. As a result, strong market values create the positive effect, generating profits that attract foreign investors to put more money into dollar-denominated assets.

Bear Markets

The bear market definition is exactly the opposite of a bull market. It’s a market where unemployment is rising, GDP is declining, and the prices are also decreasing. Here the prices are constantly falling under the pressure of negative news and the ever-increasing number of positions to sell. The bearish market is characterized by a pessimistic approach and low expectations. Eventually, reducing values have the opposite effect, creating losses that shake investor confidence and cause them to pull out their money from dollar-denominated assets, resulting in a loss of the USD value.

Accounting scandals

Accounting scandal is the intentional manipulation of financial statements to create a false appearance of corporate financial health. They are not new and the extent of the crime can vary significantly. The recent accounting scandals in the US were Enron, AIG, WorldCom, just to name a few. Most of these accounting scandals were a result of the extreme greediness of a group of people whose actions led to dire consequences which damaged whole companies and affected millions of people. From corporate scandals to major forgeries, accounting scandals can cause foreign investment in US stocks to fall. All these incidents may negatively affect the value of USD.

By Adil Maidanov | 15 October 2020

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