What Moves the USD?

The Gold Rush

Whenever the dollar is at risk of losing its value due to inflation, investors turn to gold for safety.

Unlike most financial assets, gold maintains its intrinsic value.

Gold is gold – it’s the same everywhere! So when gold prices are rising, it could be a sign that the dollar is losing its appeal.

Economic Developments in the U.S.

Fundamentally, positive economic developments in the U.S. attract more participants to invest in the U.S.

An investor would, of course, need to have some dollars to be able to transact in the U.S.

So as the demand for U.S. investments increases, the demand for the greenback rises as well.

Capital Inflows and Outflows

With respect to Japan and London, the U.S. probably has the deepest and most advanced financial markets.

This provides the many kings, sultans, billionaires, and heirs around the world with many types of investments that they can choose from.

In order to invest in these American assets, investors would first need to convert whatever currency they are holding into U.S. dollars.

The capital inflows and outflows from the U.S. financial markets can have a significant effect on the value of the dollar.

Economic Developments Around the World

Since the USD takes up about the majority of daily currency transactions, just about any major development in the world (i.e. strong GDP growth in Australia, a stock market crash in Beijing, or a Godzilla attack in Tokyo) affects its short-term valuation.

Bond Yield Differentials

With investors always looking for the best deal for their money, it is important to keep track of the differences in the yields of bonds of the U.S. and other foreign countries.

If investors see that bond yields are rising in foreign countries while yields in the U.S. are staying steady or going lower, investors will move their funds out of U.S. bonds (selling their dollars in the process) and begin purchasing foreign bonds.

Rumors on the Interest Rate Grapevine

Market participants pay attention to interest rate trends, and you should too.

If the Fed is expected to raise interest rates, this means that demand for dollar-denominated financial assets (like Treasuries) could rise, which would be bullish for the dollar.

If the Fed is expected to cut interest rates, it could lessen demand for these assets and we could see investors move their funds away from the dollar.

Since Fed officials usually drop hints about the central bank’s future interest rate moves, traders are all ears during policymakers’ speeches.

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