What Factors Drive the Value of the U.S. Dollar?

What Factors Drive the Value of the U.S. Dollar?

March 30, 2023

What factors drive the value of the U.S. dollar? Paul L. Moffat, President and Senior Financial Planner at Arista Wealth Management, explains in the newest episode of Arista Advice!

Full Transcript: 

Hello, welcome to Arista Advice! Question of the week is: "Paul, what factors drive the U.S. dollar?"

There's a lot of media attention right now about the U.S. dollar, and it's a question that was asked that we want to give some insight and some dimension to. In short, the value of the U.S. dollar is driven by a supply and demand. During periods of uncertainty, the dollar will increase, and during periods of great certainty, the dollar will usually go back down to par or even at a discount. The U.S. dollar, depending upon the strength of the economy, really drives it. Here is an example of the four biggest drivers of the value of the U.S. dollar.

Number one - the high U.S. inflation drives the Fed fundraise. So if there's high inflation, you're going to see that go up. 
Number two - interest rates. Interest rates have a big pressure and influence on the U.S. dollar. The higher the interest rates mean, higher yields for the U.S. dollars. As the rates have gone up and the Federal Reserve has raised the cost of money, then you will also see the U.S. dollar go up. 
Number three, safe haven status. An investment that is anticipated to maintain or increase in the value during times of economic downturn will also drive the value of the dollar. Also included in that is if there's too many dollars, it also drives the value of the dollar down.
And fourth and final, the economic growth. 

Historically, the U.S. has been the most reliable place and the most reliable currency. It is the world currency. It will continue to be the world currency. Many corporations, foreign and international and in the undeveloped world, still continue to send their money to the U.S. treasury market and buy treasuries because it's the safest place. The country that has the biggest military and the biggest economy is where people want to park their money. Hope this information is helpful. 

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