Ever since the US left the gold standard behind in 1973, the dollar value has fluctuated in line with market forces, economic conditions and the performance of currencies belonging to other countries. For traders who deal in foreign exchange, the expertise in determining the right time to buy or sell dollars is critical to their success. A number of factors influence the currency value of any country and here are some of them.
When a country’s industries are flourishing, industrial activity is high and employment opportunities are adequate, then the economy is said to be strong. When the US economy is strong, other countries will be inclined to invest here, which will boost dollar demand as the investors convert their own currency into dollars for making the investments. However, this will happen only if there is an expectation of sustained growth here leading to steady appreciation in the investments by foreigners.
Exports also boost the currency of a country in much the same way. As more US produced goods are bought outside the country, more money has to be converted into dollars to pay for these goods, thus hiking the demand and value of the dollar. Imports have the opposite effect because Americans importers often have to convert dollars into currencies of other countries to buy their goods.
When imports exceed exports, there is a deficit in the current account. But even if the US is borrowing money, it can still be considered an economically sound country for foreigners to invest in, as long as industrial growth and trade activity are strong.
In addition to these factors, government or corporate bonds and stocks also help raise overseas capital and improve the demand for dollars from investors. Again, this will happen only if the economy and the country’s financial system are strong.
Supply of dollar also restricts the levels to which its value can soar. Tracking market news and understanding statistics like payroll data, GDP data, and other such measures can give an indication of where the economy is heading.
Market sentiments have a huge influence on buying and investing patterns. A trader will have to feel the pulse of the general public as well as understand how rising unemployment levels or political crises subdue optimistic sentiments in the market. This is critical because as a currency trader, you cannot wait for the sentiment of the market to change to make your investment decisions. You have to predict where the market will go, and that is where the opportunity of profit lies.