The U. S. Dollar Rate Explanation

How Much Is the Dollar Worth in 5 Other Currencies and Why?

dollar value in foreign currency
The dollar's value in foreign currencies changes constantly. Photo: Tim McCaig/Getty Images

Definition: The U.S. dollar rate tells you the dollar's value compared to another currency. Since the 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. In addition, nearly half of the world's international transactions are priced in dollars.

U.S. travelers also need to know the dollar exchange rate before they go on an international trip. Even though most foreign businesses take dollars if necessary, they charge a higher exchange rate. Did you know that the cheapest dollar rate is with your credit card? Therefore, pay for almost everything you can with your credit card to get the best rate.

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 because the businesses either get their supplies internationally, export to foreign markets, or have offices or plants in other countries. Hedging means they are protecting these transactions from exchange rate changes that could damage their profitability.

The fastest growing group of forex traders seek 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. There have been times when enough traders thought a currency would rise, increasing demand and actually forcing the currency to increase in value.

Another strategy is to borrow in a currency that charges low interest rates, and invest in a currency that pays high-interest rates.

For years, many traders did this with yen. This was known as the yen carry trade. The Bank of Japan encouraged this, because it kept the value of the yen low. This allowed Japanese manufacturers to underprice their exports.

4 Factors That Affects It 

The dollar rate is affected by four factors. One is 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 U.S. to sell a lot more Treasury notes, increasing 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 dollar rate is also affected by the strength of the U.S. economy, which is considered the most powerful in the world. That's why the dollar rate actually strengthens during any global crisis. Even though decisions made in the U.S. 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.

Another factor that affects the dollar rate is the interest rate paid on U.S. Treasuries.

Usually, the lower the interest rate paid, the less demand. However, given that the dollar is a safe haven in an uncertain world, the Treasury is able to pay a low-interest rate and still receive high bid prices. This allows the U.S. to run a larger debt. Other countries must pay higher yields to renew their debt.

The large U.S. debt-to-GDP ratio would normally reduce the dollar rate. Until the financial crisis, the more the debt grew, the faster the dollar's value fell. However, this is not as much an impact as long as the dollar is being treated like a safe haven.

Euro Dollar Rate

The euro to dollar rate has depended primarily on the strength of the European Union's economy. In 2007, it 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 2002-2008, the euro rose 63% against the dollar. It has fallen since then, first because the European Central Bank raised interest rates prematurely, sparking fears of a double-dip recession. It 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, but plummeted to $1.20 by the end of 2014. By December 31, 2015, it fell even further, to $1.0906. For reasons why, see Euro to U.S. Dollar Conversion and History.

Dollar Rate in India

The dollar's strength plunged the rupee to an all-time low of 63.6 to the dollar by the end of 2014. But the rupee strengthened in 2015, ending the year at 66.4363. That's because 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. That's because the Fed is raising the Fed funds rate in 2016.

Dollar Rate to the British Pound

Right after the 2008 financial crisis the British pound fell 30%, 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 around $1.50 to $1.65. Fears that the eurozone debt crisis would hurt British exports, and further slow its economy, kept the pound at this range until July 2014, when it rose to $1.72. However, 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 $1.5027. (Source: XE Currency Charts, GBP/USD; This Is Money, Sterling Outlook, July 2012)

Canadian Dollar Rate

The Canadian dollar, known as the loonie, has traded in a narrow range of $.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 $.88, as its economy weakened slightly, and the dollar strengthened. After strengthening to $.93 in July 2014, it plummeted to $.86 by the end of the year. By the end of 2015, plummeting oil prices sent the loonie down to $.7222 against the dollar. For more, see Canada's Economy. (Source: OANDA, CAD/USD; Bloomberg, Canadian Dollar Rises Against Other Currencies, August 28, 2013)

Yen Dollar Rate

In 2015, the yen remained stable, ending the year at 120.36. In 2014, it had weakened thanks 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 continues a long-term weakening trend, as the dollar was seen as a safer haven during the recession. Although the yen is also a safe haven, against the euro especially, 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 that those affecting the U.S. economy. However, whenever economic trends in the U.S. look worse, the yen strengthens as the world's #2 safe haven currency. For more, see Japan's Economy and Yen Carry Trade.  (Source: OANDA, USD/JPY; Daily FX, Yen Rallies, July 19, 2012) 

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