What Affects the US Dollar Forex Rates?

What Affects the US Dollar Forex Rates?

The US dollar is one of the most widely traded currencies on the forex market.  If you are looking at trading this currency you need to be aware of the driving factors behind it.  There are three major factors that you should know about which are supply and demand, market psychology and fundamental factors.  Once you understand these drivers you will be able to trade this currency with more confidence and success.

Supply and Demand

All forex rates are affected by the theory of supply and demand.  This theory is very basic where value increases when there is a high demand for the currency.  However, if the amount of the currency exceeds the demand then the value will decrease.  The reason for this is that there is more product than people want.  A lot of new traders are unable to connect this theory to the forex market.

In the case of the US dollar when there are a lot of exports the demand for the dollar increases.  This is due to customers having to pay dollars to the export suppliers.  On the forex market this translates to higher prices for the dollar.  It is not only exports that increase the demand on a currency.  If the US government or corporations sell bonds to foreign investors then the demand for the dollar increases.

Forex Rates and Market Psychology

Market psychology has to do with how investors view the country.  If the US economy is doing well then investors view the country in a favourable manner.  However, if the economy is not doing well then investors are not favourable.  Favourable investor views translate to an increase in the forex rates of the US dollar.  This is due to investors want to place their money in the country.  When this occurs the demand on the US dollar increases driving the value of the currency up.  However, when investor views are unfavourable then they pull their money out of the country decreasing the value of the currency as they increase the supply.

Fundamental Factors

There are many fundamental factors that drive the dollar.  These factors are the economic and political news and events which relate to the way that the country runs.  The main events that should be looked at are interest rates, inflation, employment levels and consumer spending.  These factors not only tell us about the economy of the country, but also give insight into how investors will view the country.

Putting Them Together

It is important that you take these driving factors and put them together.  While it is possible to look at them individually they do affect each other and should be considered together.  When you look at all of the factors you can gain some insight into what the market may be doing or where it will turn.  Of course, when you trade the US dollar you also have to consider the other currency in the pair.  Certain US dollar currency pairs are more volatile than others and are prone to large movements.  However, there are other pairs that do not move very much.

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