What Affects the U.S. Dollar Rate?
What the Dollar Is Worth in Five Other Currencies
The U.S. dollar rate tells you the dollar's value compared to another currency. The U.S. dollar is the world's reserve currency. As a result, most businesses, government officials, and travelers around the world need to know the exchange rate between their own currencies and the dollar. That's especially important for contracts that are priced in dollars, such as gold and oil.
U.S. travelers need to know the current dollar value before they go on an international trip. Though some foreign businesses take dollars if necessary, they will almost certainly charge a fee.
About the U.S. Dollar Rate
You can get the cheapest dollar rate by using your credit card, especially if your card has no foreign transaction fees—so when traveling internationally, pay for almost everything you can with your card to get the best rate.
Take a look at the chart below, which illustrates the trade-weighted U.S. dollar index from 2000 through today.
The dollar rate is of vital interest to foreign exchange (forex) traders. Many of them work for businesses that seek to hedge their exposure to foreign currency volatility. This risk occurs when businesses trade internationally. They either get their supplies from other countries or export to foreign markets.
They also often have offices or plants overseas. Hedging allows them to protect these transactions from exchange rate changes that could damage their profitability.
Many forex traders seek to profit from the currency trade alone. One way is by buying a currency they think will appreciate against the dollar. Once the currency grows in value, they trade it back for more dollars than they paid for it. When enough traders think a currency will rise, that increases demand and forces the currency's value up. Traders’ actions can also force the dollar to decline.
Many traders also borrow in a currency that charges low interest rates, then invest in a currency that pays high interest rates. For years, many traders did this with yen. That's called the yen carry trade. The Bank of Japan encouraged this because it kept the value of the yen low, which allowed Japanese manufacturers to competitively price their exports.
Four Factors That Affect U.S. Dollar Rates
U.S. dollar rates rise and fall, but it doesn't happen at random. There are four major factors that impact the U.S. dollar rate.
Supply and Demand
The first factor impacting the U.S. dollar rate is the law of supply and demand. Because the dollar is the world's reserve currency, it's automatically in higher demand than other currencies. This has allowed the U.S. to sell a lot more Treasury notes—and it can increase supply without suffering from higher interest rates. As a result of this increased fiscal stimulus, the U.S. economy was very strong until the 2008 financial crisis.
Strength of the Economy
A strong U.S. economy will buoy the dollar's value. In addition, since the dollar is the global currency, the dollar rate actually strengthens during any global crisis.
Even though decisions made in the U.S. caused the 2008 financial crisis, investors flocked to the dollar because it was seen as a safe haven.
The dollar also strengthened in the summers of 2011 and 2012. Investors fled from the euro during the eurozone debt crisis.
Every currency's value is affected by the interest rates paid in that country. For the U.S. dollar, it's the interest rate paid on U.S. Treasurys. Usually, the lower the interest rate paid, the less demand. The U.S. dollar is a safe haven in an uncertain world.
This allows the U.S. Treasury to pay a low interest rate and still receive high-bid prices—meaning the U.S. can run a larger debt. Other countries must pay higher yields to renew their debt.
Debt to GDP Ratio
Pay attention to the country's debt-to-gross domestic product ratio. A high ratio would normally reduce its currency's value. Again, the dollar's role as the global currency changes that dynamic a bit.
Until the 2008 financial crisis, the more the debt grew, the faster the dollar's value fell.
The high U.S. debt doesn't impact the dollar as much while it's being used as a safe haven.
Euro to Dollar Rate
The euro to U.S. dollar conversion rate depends on the relative strength of the European Union's economy. In 2007, the EU surpassed the U.S. as the world's largest economy. As the success of the EU grew, so did the value of the euro. Between 2002 and 2008, the euro rose 63% against the dollar.
The euro peaked on April 22, 2008, with an exchange rate of $1.60.
Since 2008, the euro's value has fallen. First, the European Central Bank raised interest rates too soon after the Great Recession. That sparked fears of a double-dip recession. The euro fell even further once the eurozone debt crisis called into question the future of the eurozone itself.
The euro strengthened in 2013 as it looked like the worst was over, but in 2014, it plummeted to $1.21. In 2016, Brexit and weakness in Italian banks sent the euro down to $1.04.
In 2017, the euro strengthened to $1.20 after investigations into the connections between President Trump's administration and Russia.
By March 2020, the euro had fallen to $1.07. That's when Europe was hit hard by the COVID-19 pandemic. By July, the U.S. had taken the lead when it came to COVID-19 cases, while Europe's cases had declined. As a result, the euro rose to $1.18 by July 31.
Dollar Rate in India
The dollar's strength sent the rupee to a record low of 63.04 to the dollar by the end of 2014. The rupee strengthened in 2015, ending the year at 66.19. Low oil prices helped India's economy, which imports oil.
India has a very high current account deficit, which means it borrows and buys more from overseas than it saves and exports. That could be a problem if dollar-denominated loans come due at higher interest rates.
The U.S. Federal Reserve began raising rates in 2015. By 2017, the rupee had weakened to 63.83. By December 2019, it rose to 71.36.
In March 2020, when the pandemic began to take hold, it rose to 76.37. It has not changed significantly as of April 2021.
British Pound to the Dollar
Right after the 2008 financial crisis, the British pound fell 30%. It went from $2.10 to $1.43 in 2010. Expansive monetary policy increased supply, keeping downward pressure on the currency. In 2012, it strengthened slightly to between $1.50 and $1.65. Fears that the eurozone debt crisis would hurt British exports kept the pound in this range.
In July 2014, fears subsided, and the pound rose to $1.72, though by the end of 2015 it was at $1.47.
On June 23, 2016, the United Kingdom voted to leave the EU. The pound plummeted to $1.36. The uncertainty over what Brexit would mean for London's economy sent traders scattering. By August 2019, it had dropped even further, to $1.21. The U.K. formally left the EU on Jan. 31, 2020. The pound then recovered slightly to $1.32 as some of the uncertainty waned.
Canadian Dollar Rate
The Canadian dollar, known as the loonie, has generally traded in a narrow range of $0.80 to $1.01 against the U.S. dollar since the 2008 financial crisis. Both currencies are seen as safe havens compared to the euro and other riskier investments.
In 2013, the Canadian dollar fell to $0.88, as its economy weakened and the dollar strengthened. After strengthening to $0.93 in July 2014, it fell to $0.86 by the end of the year. By the end of 2015, plummeting oil prices sent the loonie down to $0.72 against the dollar.
In 2017, it rose to $0.83. That was a vote of confidence in Canada's new Prime Minister, Justin Trudeau, who promised to spend C$60 billion on new infrastructure. By the end of 2018, the loonie had fallen to $0.73. Low oil prices were slowing the Canadian economy.
The COVID-19 pandemic sent the Canadian dollar plummeting to $0.69 in March 2020. By April 2021, it had recovered to $0.81.
Dollar to Yen Rate
In 2014, Japan's currency weakened due to Prime Minister Abe's expansion of the money supply, undertaken to boost economic growth. By December 31, 2014, the dollar was worth 119.85 yen. That continued a long-term weakening trend, as the dollar was seen as a better safe haven during the recession. In 2015, the Japanese yen ended the year at 120.27.
The U.S. dollar weakened in 2017 due to uncertainty over President Trump's economic policies. As a result, the yen strengthened. A dollar could only buy 112.69 yen by the end of 2017, and the yen continued strengthening to 104.83 by March 2018.
After staying in the range of 104–114 for two years, the yen strengthened to 102.52 on March 9, 2020. However, it weakened slightly to 111.44 as a result of a strengthening dollar during the onset of the pandemic. By April 2021, the yen had recovered to 107.94.
The yen is also a safe-haven currency. But the Japanese economy has been fundamentally weaker. It is plagued by a 200% debt-to-GDP ratio, deflation, and an aging workforce. These are seen as worse problems than those affecting the U.S. economy. Whenever economic trends in the U.S. look worse, the yen strengthens as the world's No. 2 safe-haven currency.