The United States is the strongest and largest economy in the world. The US currency remains dominant over other global currencies in international markets. The behavior of the US dollar significantly affects global markets, culminating in both positive and negative consequences in these markets.
Here are 10 ways the USD affects global markets:
- A stronger dollar slows trade in international markets. A stronger dollar weakens other currencies in global markets, making it more expensive to buy dollar-denominated goods.
- However, these markets are also excited if they export to the United States. A stronger dollar causes the depreciation of domestic currencies in these markets, creating inflation of domestic currencies.
- As the dollar strengthens against other currencies, demand shifts from the U.S. market to global markets, increasing economic and financial activity in global markets.
- The stronger dollar also attracts capital inflows in foreign direct investment (FDI) and other investor investments in USD to these markets. This mainly happens in developing countries where emerging markets have high economic growth rates.
- Capital inflows in USD in these foreign markets stimulate economic activities such as lending, employment and consumption, thus stimulating growth in these markets.
- Goods such as precious metals and oil on the international market are quoted in USD. Thus, the effect of the USD determines the cost of living in world markets. The consequences of a weaker dollar in these markets include lower gas prices, while a stronger USD makes gas more expensive to buy for the consumer.
- Global financial markets are closely monitoring the USD to determine the spot price for fast-moving goods. Any fluctuations in the USD trigger a series of sales and purchases of these goods speculating on any outcome based on dollar behavior.
- An increase in the Federal Reserve rate is causing the dollar to become more expensive for investors. This can trigger capital flight from these markets; slowing growth and reducing demand for USD-denominated products.
- Also, high interest rates can reduce USD liquidity and consequently reduce investment, resulting in job losses and a global recession as the 2007 global recession recently experienced.
- As a reserve currency and a 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 on the global financial market, while it still has an impact on the balance of payments based on the reserves held in USD held by the entity.