The factors that affect the movement of the US Dollar
The US dollar is one of the major fiat currencies in the forex market, but its relative value can be affected by the economic activity of the United States, international trade and geopolitical events.
In the past year, the political turmoil that the country has faced, as well as the unpresented affects of the worldwide pandemic, has seen the US currency fall to its lowest levels since April 2018. With a continuing decline predicted for the rest of 2021, here we’ll explain the factors that can cause a fall in value of the US dollar.
Oil and currency
There is a correlation between the US dollar and oil trading, when it comes to financial markets. A rise or decline in one, can have a sympathetic or opposing reaction in the other.
Firstly, the price of oil is valued in US dollars, so either a price movement in the forex market or the value of the commodity, will cause a fluctuation in this relationship. The United States has also become one of the predominant producers of crude oil, and this has influenced the economic growth of the US, and subsequently the value of the dollar. Furthermore, this area of the energy sector significantly contributes to US GDP.
However, the recent fall in oil prices due to supply and demand issues, has seen gains in the US dollar. Yet, this relationship has an impact again, making US dollar-priced oil more expensive for those buying crude in other currencies. This further proves the fact that trading in oil and the dollar are intricately intertwined.
The inauguration of a new president, and the policies that they are set to implement, will always have an affect on the US economy and the value of the dollar. In general, elections can be accompanied by increased market volatility, but in recent years, political uncertainty has created turmoil for the US currency.
The White House has witnessed some ground-breaking events since the elections in November 2020. Not only did the Democratic party win across both the Congress and Senate, but history was made when the world saw a rally take place on Capitol Hill, and the impeachment of former president Donald Trump, for the second time. These disruptions to US politics have had an effect on the sentiment and market psychology of the dollar’s value, and as a result the decisions made by both national and foreign investors.
The victory of Joe Biden and the Democrats has been considered by financial experts to in fact add more pressure to the decline of the US dollar. This derived from the fact that Biden is expected to expand government spending, causing inflation to rise. This is also dependant on the reaction from the Federal Reserve, who have had to contend with the ongoing pandemic.
On the other hand, the US dollar could see a rise due to its connection to the country’s economy. An increase in stimulus proposed by the president has influenced a forecast for economic growth in 2021 and 2022, and as a result, a positive outcome for the value of the dollar. This speculation has been backed by previous trends in the forex market, which saw a slight rise in the US dollar in January 2021, when some certainty was reinforced by the Democratic win and what seemed like an end to political chaos.
As much as investors can speculate on the forex market movement using fundamental and technical analysis, no one could have predicted the global impact of COVID-19 in 2020, affecting both our lives and the global economy.
It is common for traders to keep up to date with the news and current affairs, as these external factors can have an impact on the forex market, such as changes in national economies, and interest and inflation rates.
In a bid to balance out the huge impact of the pandemic of the economy, the Federal Reserve in the US decided to cut interest rates dramatically, which in turn caused a continuing decline in the value of the dollar.
However, with the successful rollout of vaccines globally, there is some hope for the future and a recovery for the financial markets in general, including forex. The fact that the US is likely to be one of the countries that have the ability to both produce and implement the vaccines to the public, as well as pioneering a one-jab vaccine, bodes well for the outlook of the nation’s economic growth.