what determines the dollar exchange rate
In a currency pair, the quotes can be influenced by the fundamental factors of both one and the second country, whose currencies are considered in a pair. The question is which factor will be stronger, and whether there are additional external influencing factors that can indirectly affect the quotes. It seems to be obvious that macro and microeconomic indicators affect the exchange rate. However, the obvious things lying on the surface sometimes go unnoticed for some reason. What determines the US dollar exchange rate: let’s try to systematize what seems obvious to many.
What determines the US dollar exchange rate
The factor that has the greatest impact on the dollar rate is still the Fed’s policy. Other currencies are similarly influenced by the Central Banks, for which the national currency is an instrument of regulation and control over the external and internal economy of the country, its competitiveness in the world arena.
The participants in the system, whose actions are coordinated by the FRS, are importers and exporters, who actually form the value of the dollar. There is also a separate group – investors who “vote” for quotes with their capital. If investors are interested in a currency and can make money on it, then money is invested in the country, and we can also talk about the purchase of derivative securities.
What determines the US dollar exchange rate:
- Internal economic factors:
- Data on GDP growth rates. In theory, GDP growth strengthens the national currency, but like many fundamental indicators, it is viewed in dynamics. If in the current year the GDP growth in percentage terms is lower than the previous one, this is a negative signal.
- Balance of payments and the level of import-export operations. The excess of imports over exports indicates a decline in the national economy. On the other hand, exporters benefit from a weaker national currency, since they receive their earnings in another currency, and for raw materials and labor, they mostly pay in the national currency.
- Employment rate. In the US, this is one of the most influencing statistics (Non-Farm).
- Dynamics of sales in the primary real estate market.
- Durable goods orders. Minor, but important statistics for making a forecast for the manufacturing sector.
- Oil and gas reserves.
- Consumer price index.
Some of these indicators are inherent only in the United States, but in general, we think the idea of what to look for in fundamental analysis is clear.
Financial fundamental factors should be distinguished into a separate group:
- Discount rate.
- Inflation rate.
- The volume of the money supply.
- The level of stability in the work of financial organizations (banks, investment and pension funds, insurance companies).
- External economic and political factors:
- Participation and effectiveness from participation in international organizations. Example: OPEC policy and opposition to Saudi Arabia against the United States. Changes in oil prices indirectly affect the dollar exchange rate.
- Sanctions from other states.
- Migration policy.
Another factor on which the dollar exchange rate depends is force majeure: natural disasters, wars (including trade), etc.
Add in the comments what else, in your opinion, was missed in the list of key influencing factors. Thanks in advance!