The United States is the strongest and largest economy in the world. It remains the dominant US currency in international markets compared to other world currencies. The behavior of the US dollar has a significant impact on global markets, with positive and detrimental effects on those markets.
Here are 10 ways in which the USD affects world markets:
- A stronger USD is slowing down trade in international markets. A stronger USD weakens the rest of the currencies in global markets, making it more expensive to buy raw materials denominated in dollars.
- However, these markets are also affected if they export to the United States. Stronger dollars in these markets result in the depreciation of local currencies, leading to inflation in domestic currencies.
- When the USD moves against other currencies, demand shifts from the U.S. market to global markets, resulting in increased economic and financial activity in global markets.
- A stronger USD also attracts foreign direct investment (FDI) and other investments from USD investors to these markets. This is mostly experienced in developing countries, where markets are emerging markets with high rates of economic growth.
- In these foreign markets, USD capital flows drive economic activities such as lending, employment and consumption, and thus stimulate the growth of these markets.
- In the international market, precious metals such as precious metals and oil are quoted in USD. Therefore, the performance of the USD determines the cost of living in world markets. The effects of a weaker USD for these markets include lower gas prices, while a stronger USD makes it more expensive for the consumer to buy gas.
- Global financial markets closely monitor the USD to determine the spot price of fast-moving products. The fluctuations of the USD trigger a series of sales and purchases of these commodities, based on speculation of any result, based on the behavior of the dollar.
- The Federal Reserve’s rate hike is costing investors a dollar. This can lead to capital flight from these markets; slowing growth and reducing demand for USD products.
- In addition, high interest rates could reduce the liquidity of the USD and then reduce investment, resulting in job losses and a global recession as recently as the 2007 recession.
- As the standard reserve currency and international currency in most countries, the USD interest rate determines the cost of financing external debt for global markets. The exchange rate of the USD determines the interest paid and the accessibility of credit in the global financial market, while the impact of the balance of payments on an entity’s USD reserves.