US Dollar Rate and the Four Factors That Affect It
How Much the Dollar 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. 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 the dollar, such as gold and oil. Almost half of the world's international transactions are denominated in dollars.
U.S. travelers need to know the current dollar value before they go on an international trip. Even though most foreign businesses take dollars if necessary, they charge a fee. Did you know that the cheapest dollar rate is with your credit card? So, pay for almost everything you can with your card to get the best rate. You can even find cards that don't charge an international transaction fee. The chart below illustrates the trade-weighted U.S. dollar index from 2000 through today.
The dollar rate is of vital interest to foreign exchange traders. Most of these 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. Many also have offices or plants overseas. Hedging allows them to protect these transactions from exchange rate changes that could damage their profitability.
The fastest-growing group of forex traders seeks to profit from the currency trade alone. One way is to buy a currency that 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.
They 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. This allowed Japanese manufacturers to competitively price their exports.
Four Factors That Affect It
Four factors affect the dollar rate.
- The first is the law of supply and demand. Since the dollar is the world's reserve currency, it's automatically in higher demand than other currencies. This has allowed the United States to sell a lot more Treasury notes. 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.
- The second factor is the strength of the U.S. economy. It's considered the most powerful in the world. The dollar rate actually strengthens during any global crisis. Even though decisions made in the United States caused the financial crisis, investors flocked to the dollar because it was seen as a safe haven. The same thing happened in the summer of 2001 and 2012, as investors fled from the euro during the eurozone debt crisis.
- A third factor that affects the dollar rate is 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. That allows the U.S. Treasury to pay a low-interest rate and still receive high bid prices. That allows the United States to run a larger debt. Other countries must pay higher yields to renew their debt.
- The fourth factor is the large U.S. debt-to-gross domestic product ratio. That would normally reduce the dollar rate. Until the financial crisis, the more the debt grew, the faster the dollar's value fell. But this is not as much an impact as long as the dollar is being treated 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, it surpassed the United States 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 percent against the dollar.
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. It strengthened in 2013 as it looked like the worst was over. In 2014, it plummeted to $1.20. By December 31, 2015, it fell even further to $1.09. In 2016, Brexit and weakness in Italian banks sent the euro down to $1.04. The euro rose to $1.20 in 2017. The dollar weakened after investigations into the connections between President Trump's administration and Russia. The euro ended 2018 at $1.14.
Dollar Rate in India
The dollar's strength sent the rupee to a record low of 63.60 to the dollar by the end of 2014. But the rupee strengthened in 2015, ending the year at 66.44. 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 as dollar-denominated loans come due at higher interest rates. The Fed has been raising the fed funds rate. By 2017, the rupee had weakened to 63. By the end of 2018, it rose to 69.71.
British Pound to the Dollar
Right after the 2008 financial crisis, the British pound fell 30 percent. It went from $2.10 to $1.40 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 at this range. In July 2014, fears subsided, and the pound rose to $1.72. But by the end of the year, the strengthening dollar pushed the sterling down to $1.56. It fell even further in 2015, ending the year at $1.50.
On June 23, 2017, the United Kingdom voted to leave the EU. The pound's value plummeted to $1.29. The uncertainty over what Brexit would mean for London's economy sent traders scattering. But by September 2017, it had recovered to $1.34. The roadmap to Brexit was clearer by then. By the end of 2018, new concerns over Brexit sent the pound down to $1.28.
Canadian Dollar Rate
The Canadian dollar, known as the loonie, has 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 a high of $0.83. That was a vote of confidence in Canada's new Prime Minister. Justin Trudeau promised to spend C$60 billion in new infrastructure. By the end of 2018, it had fallen to $0.73. Low oil prices were slowing the Canadian economy.
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, the dollar was worth 120 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 120.36.
But the dollar weakened in 2017 due to uncertainty over Trump's economic policies. As a result, the yen strengthened to 112.64 per US dollar in 2017. By the end of 2018, a dollar could only buy 109.63 yen.
The yen is also a safe haven against the euro. But the Japanese economy has been fundamentally weaker. It is plagued by a 200 percent debt-to-GDP ratio, deflation, and an aging workforce. These are seen as worse problems than those affecting the U.S. economy. But whenever economic trends in the United States look worse, the yen strengthens as the world's No. 2 safe haven currency.