Factors Effecting Currencies - Other Countries

It is apparent that the U.S dollar exerts a big impact on the global economy and has been the world’s major currency for decades. However, other countries are also affecting the dollar’s value. In particular, the “Major Movers” such as China and Russia seem to be very enthusiastic about the idea of de-dollarizing the world economy. While the political conflicts may seriously undermine the value of the dollar, there are also many other causes such as international trade or consumption that comes from outside the country and should be taken into account. The points below elaborate on how other countries affecting the value of US dollar:

Turmoil in other countries

When other countries are in a state of conflict, their respective currencies may be perceived as unstable. In times of uncertainty, investors used to flock to the dollar, as it is considered a safer bet. As long as the US is not involved in the conflict, the turmoil in other countries may stabilize and strengthen the value of the dollar.

Stability in other countries

The state of stability in other countries has an opposite effect. If other countries are consistent in their policy-making and steady both politically and economically, the dollar may decline due to increasing consideration of investors to these alternative currencies. Some investors may decide to diversify their investments into non-dollar denominated assets, perceiving them as less risky. As an example, the rising Euro it’s an attractive alternative to the dollar which investors choose to diversify if the dollar becomes unstable.

A change in foreign reserves

The US dollar benefits strongly from being the world’s reserve currency. Many central banks hold more dollars than any other currency, but when they plan to diversify their currency portfolios, the dollar faces issues. This could mean they're selling dollars, or just stop buying more. When a big buyer like China chooses to stop adding dollars to its foreign reserves, this is particularly harmful.

Acceptance of oil in dollars

As long as most world oil contracts are settled in the USD, other countries have to use the US currency. This increases the dollar's demand and, thus, its value. In addition, a large portion of their oil revenues are kept in dollars by most oil exporters.

Trade War

Trade war is an ongoing dialogue between two nations in which each seeks to weaken the other's economic prowess. Regarded as a trade protectionism (policy that protects domestic industries from unfair competition from foreign ones), trade wars are conducted by implementing tariffs and duties on specific imports. As it escalates, the trade war reduces international trade. While in the short-run it may work, in the long-run a trade war costs jobs, triggering inflation and hampering the economic growth. In the long run, trade war may hurt local companies, consumers and the economy. When it comes to the U.S.-China trade war, as key events unfold, the USD is most likely to experience spikes in periodic short-term volatilities, while in the long-term, performance of the USD will depend on U.S.-global economic performance, actions of the U.S. Federal Reserve System and the adopted monetary policies of central banks around the globe.

By Adil Maidanov | 14 October 2020

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