Factors Influencing Unabated Dollar Growth!

Soniya Khanna

25 Jun, 2023

In a country, its strong economy depends upon investment from all over the world. An increase in investment value or the highest yield on investment is something which investors from abroad look after. Here we are going to discuss factors affecting dollar growth;

Dollar Strength: Why so high?

There are the following reasons for Dollar strength:

• End of the Extensive Monetary Policy
• Low Money Supply (which increased the value of the Dollar)

The dollar flows out of the U.S. in case of import of goods & services for American consumption.

The deficit in the current account occurs when imports are higher than exports. To offset the trade deficit, the strong economy of a country attracts foreign capital.

The economies of the other countries keep growing as the U.S. has continued consumption which allows these countries to export to the U.S. to fulfil their consumption.

What is the reason for INR Depreciation and U.S Dollar Growth?

Before going towards the hike in the dollar price, let’s understand the exchange rate trend over the past few years.

Since 2011 there is a steady decline in the strength of the Indian Rupee (INR); therefore, the price of the goods is up.

There is a direct impact of the hike in the U.S Dollar on the fuel price as fuel consumption in India is completely based on the purchases made from foreign countries.

For Trader

From the point of view of taking a position in a dollar, a trader needs to consider various factors which may affect the dollar value in order to determine the right direction.

What are the factors that affect the Dollar Growth?

We can determine the value of the dollar on the basis of the following factors:

Now let’s have a look at all these factors driving Dollar Value:

Demand vs Supply

Demand for the dollar arises when the U.S. exports its goods or services as customers need to pay in dollars for importing goods and services. Therefore the need for conversion of local currency into dollars arises in order to make the payment.

Payment has to be made in dollars by foreign investors when the bonds are issued by the U.S. government or large American corporations to raise capital.

It is also applicable to non-U.S. investors at the time of purchase of U.S. corporate stocks, and in order to purchase these stocks, foreign investors would have to sell their currency to buy dollars. It creates more demand for dollars which puts pressure on the dollar supply.

Despite fluctuations in the U.S. economy, the demand for the dollar can often persist as during global economic uncertainty U.S. dollar is considered safe.

Market Psychology

In case due to increasing unemployment, the U.S. economy weakens, and consumption gets slowed down, for instance, then the U.S. will confront the possibility of a sell-off. Therefore there will be a dampening effect on the dollar when foreign investors buy back their local currency.

Technical Factors

Traders need to ascertain the demand & supply of dollars. For this, we have to pay attention to news or events which may impact the value of the dollar. To determine the strength or weakness of the economy, information related to various government statistics, such as payroll data, GDP data and other economic information, is required.

Additionally, to ascertain the general economic sentiment, it is necessary to get to know the views of larger players in the market, such as investment banks and asset management firms. Rather than the economic fundamentals of demand & supply, sentiments often drive the market.

Traders analyze the historical patterns affected by seasonal factors such as support and resistance levels and technical indicators. It helps in predicting future price movements.

The same combinations have been used by the traders usually to determine the buy or sell decisions.

During the recession in 2007, the government took steps to fuel economic growth by increasing spending. The main purpose was to enhance employment in order to increase consumption.

This step had been taken at the expense of the national deficit. To increase the supply of dollars, the government took the step of printing money and selling government bonds to foreign investors.

In place of looking after these factors, it is advisable for traders to keep an eye on the Dollar Index chart for the overview of the dollar against the other currencies in the index for profitable trading positions.

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