The United States is the world’s strongest and largest economy. US currency remains dominant over other global currencies in the international markets. The behavior of the US Dollar impacts global markets significantly, culminating to both positive and adverse consequences in these markets.
Here are 10 ways that the USD affects world markets:
A stronger USD slows down trade in the international markets. A stronger USD weakens the other currencies in global markets, making it more expensive to purchase dollar-denominated commodities.
However, these markets also get excited if they are exporting to the United States. The stronger dollar causes depreciation of the local currencies in these markets, creating inflation of the domestic currencies.
When the USD rallies against other currencies, demand shifts from the United States market to the global markets, hence increasing economic and financial activity in the global markets.
A stronger USD also attracts capital inflows in foreign direct investment (FDI) and other investment from USD investors to these markets. This is mostly experienced in developing countries where the markets are emerging markets with high economic growth rates.
Capital inflows in USD in these foreign markets spur economic activities such as lending, employment, and consumption, hence stimulating growth in these markets.
Commodities such as precious metals and oil in the international market are quoted in USD. Therefore, the performance of the USD determines the cost of living in world markets. The consequences of a weaker USD to these markets include lower gas prices while a stronger USD makes the gas more expensive to purchase for the consumer.
Global financial markets monitor the USD closely to ascertain the spot price for fast moving commodities. Any fluctuations in the USD trigger a series of sales and purchases of these commodities in speculation of either outcome based on the behavior of the dollar.
A hike in the Federal Reserve rate causes the dollar to become more expensive for investors. This can trigger capital flight from these markets; slowing growth and reducing demand for USD-denominated products.
Also, high-interest rates can reduce USD liquidity and subsequently reduce investment, resulting in job losses and a global recession as recently experienced in the 2007 global recession.
As a reserve currency and standard international currency in most countries, the interest rate of the USD determines the cost of financing foreign debts for the global markets. The foreign exchange rate of the USD determines interest paid and the accessibility of credit in the world financial market while still having an impact on the balance of payment based on the USD reserves held by an entity.