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US Exchange Rate: Understanding the US Dollar’s Power

May 14, 2015

Understanding the US Exchange and the Power of The Dollar

Many people around the world have grown up believing the US dollar to be the most powerful currency in the world.

They’re probably right.

Have you heard of the 80/20 rule where 20% of one thing dictates 80% of something else?

For example; what if we said that 20% of the world’s people own 80% of its money?

According to the Trumpet, there was a time in history where 86% of the world’s trades were notated in dollars.

The Purchasing Power of the Dollar

Therefore, countries outside of the United States had to keep dollars on hand just to participate in business matters. This obviously led to a demand for the dollar increasing its values against the globe’s currencies. US Dollar Bill

Losing Dominion

By the 21st century, the rest of the world had become much more self-sufficient. There was less of a need for US goods along with its dollar, and lesser investments in US business.

As members of the European Union (EU) shifted more toward the Euro, the rest of the world seemed to be finding itself as well.

Another supporting factor in the dollar’s decrease during the early 2000s was lower interest rates due to the increase of money. According to some commentators, the majority of the dollar’s supply grew in currency, and most of it was held in countries outside of the United States. Therefore, the demand for the dollar dropped and its value went along with it.

The Comeback

The United States of America possesses arguably the world’s biggest and most assorted economy.

Its GDP (gross domestic product) makes up for almost 20% of the world’s business. Within the last year, the dollar has started to reestablish itself as the world’s most sought after currency. CNBC reported earlier this year that the US is setting the standard for the rest of the world. Its total value of goods produced and services provided rose at a 5 percent annual rate from last July through September.

Only in the early 2000s had the US experienced such a surge.

The Washington Post recently reported that the US economy was doing so well that the Federal Reserve was getting ready to boost rates.

On the other hand, the rest of the world is not keeping up with the US’s pace and is lowering their rates.

As the dollar strengthens, it makes American-made goods much pricier and less competitive when compared to other countries’ goods. For the US, this leads to lower exports and higher domestic sustainability which is attractive to investors. Obviously, investors influence economic activity by determining where they put their money and this can potentially influence exchange rates.

Danger of Power

Altogether, the whole world largely remains on a budget.

Though we all want the best products, services, and wise investments, we all want to save money where we can.

If the US dollar continues to rise in status versus other currencies, its cost can be a repellent rather than an attraction as the cost of US resources rise.

US News stated that if a similar good is available from a country other than the US, other countries may buy it from that other country. When the demand is less for US companies’ products, the US will have to lower production and get rid of some jobs, making them less attractive to investors.

It’s quite a balancing act and one that will continue to affect the US dollar exchange rate.

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