So while good news at home helps explain part of the gain, troubles abroad have reduced the relative value of currencies overseas. In Japan, for example, the yen has been sliding since last summer as that country slid into recession quarter after the government imposed a sales tax increase.
Having survived a snap re-election, Prime Minister Shinzo Abe has promised to jump-start growth with a series of long-awaited reforms. And the Bank of Japan continues to try to pump up growth by buying bonds to lower rates, boost inflation and drive down the value of the yen to aid Japanese exporters. Europe's economy is also slowing, and inflation is slowing—two reasons central bankers there recently voted to pump more cash into the economy.
European investors are also worried that a newly elected Greek government—ushered into office on a pledge to renegotiate crushing debt burden—could revive a debt crisis that shook the euro zone in As the global economy has weakened, emerging markets such as Brazil are getting hit hard.
Since mid, the dollar has surged nearly 20 percent against the Brazilian real as the local economy is coping with slow growth and high inflation. Brazil's central bank is considering raising rates to try to fight inflation, but that could further slow growth.
Russia has been among biggest currency losers, thanks to the crash in the price of oil and a series of economic sanctions imposed by the U. Since the middle of last year, when oil prices began falling, the dollar has nearly doubled in value against the Russian ruble. As the Russian economy slides toward recession, inflation is rising and money has fled the country. Russian central bankers have sharply raised interest rates to try to stop the bleeding, but they have dwindling foreign reserves to fight the rubles slide.
Skip Navigation. VIDEO So what exactly, makes the value of a currency rise or fall? Positively, a rising dollar is cutting import prices, keeping a check on inflation.
While the U. As a result, other world economies e. Europe may see a boost in their exports from the strong dollar. In the long-run, this should lead to a healthier, more balanced global economy. However, a surge in the dollar tends to hurt sales and profits of U. This is because foreign profits get translated back into U. This allows us to focus on uncovering opportunities in great businesses at bargain prices.
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List of Partners vendors. The economy's performance is at the heart of the decision to buy or sell dollars. A strong economy will attract investment from all over the world due to the perceived safety and the ability to achieve an acceptable rate of return on investment. Since investors always seek out the highest yield that is predictable or "safe," an increase in investment, particularly from abroad, creates a strong capital account and a resulting high demand for dollars.
On the other hand, American consumption that results in the importing of goods and services from other countries causes dollars to flow out of the country. If our imports are greater than our exports, we will have a deficit in our current account. With a strong economy, a country can attract foreign capital to offset the trade deficit.
That allows the U. This also allows other countries to export to the U. From a currency trading standpoint, when it comes to taking a position in the dollar, the trader needs to assess these different factors that affect the value of the dollar to try to determine a direction or trend.
The methodology of determining dollar value trades can be divided into three groups as follows:. Below we'll take a look at each group individually and then see how they work together as a unit. When the U. Therefore they will have to convert their local currency into dollars by selling their own currency to buy dollars to make the payment. In addition, when the U. This also applies to the purchase of U. These examples show how the U. On top of this, the U. In the case that the U. When foreign investors buy back their local currency, it has a dampening effect on the dollar.
Traders are tasked with gauging whether the supply of dollars will be greater or less than the demand for dollars. To help us determine this, we need to pay attention to any news or events that may impact the dollar's value.
This includes the release of various government statistics, such as payroll data , GDP data , and other economic information that can help us to determine whether there is strength or weakness in the economy. In addition, we need to incorporate the views of larger players in the market, such as investment banks and asset management firms, to determine the general economic sentiment. Sentiment will often drive the market rather than the economic fundamentals of supply and demand.
To add to this mix of prognostication, traders are tasked with analyzing historical patterns generated by seasonal factors such as support and resistance levels and technical indicators. Many traders believe that these patterns are cyclical and can be used to predict future price movements.
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