The United States is the world’s strongest and largest economy. The US currency remains dominant against other global currencies in international markets. The behavior of the US dollar significantly affects global markets, culminating in positive and negative consequences in these markets.
Here are 10 ways the USD affects global markets:
-
A stronger USD slows trade in international markets. A stronger USD weakens other currencies in global markets, making it more expensive to buy dollar-denominated goods.
-
However, these markets also get excited if they export to the United States. A stronger dollar causes local currencies to depreciate in these markets, creating domestic currency inflation.
-
When the USD appreciates against other currencies, demand shifts from the United States market to global markets, increasing economic and financial activity in global markets.
-
A stronger US dollar also attracts capital inflows of foreign direct investment (FDI) and other investments by US dollar investors to these markets. This mostly happens in developing countries where there are emerging markets with high rates of economic growth.
-
USD capital inflows in these foreign markets stimulate economic activities such as lending, employment and consumption, thereby stimulating growth in these markets.
-
Commodities such as precious metals and oil are quoted in USD on the international market. Therefore, the performance of the USD determines the cost of living in world markets. The effects of a weaker USD on these markets include lower gas prices, while a stronger USD makes gas more expensive for consumers to purchase.
-
Global financial markets closely monitor the USD to determine the current price of fast-moving commodities. Any fluctuations in the USD trigger a series of sales and purchases of this commodity in speculation about any outcome based on the dollar’s behavior.
-
A Federal Reserve rate hike causes the dollar to become more expensive for investors. This can encourage capital flight from these markets; slowing growth and decreasing demand for USD-denominated products.
-
Also, high interest rates can reduce US dollar liquidity and consequently reduce investment, resulting in job losses and global recession as recently happened in the 2007 global recession.
-
As the reserve currency and standard international currency in most countries, the USD interest rate determines the cost of financing foreign debt for global markets. The USD exchange rate determines the interest paid and the availability of credit in the global financial market, while still having an impact on the balance of payments based on the US reserves held by the entity.