10 ways the US dollar is affecting the global markets

The United States is the strongest and largest economy in the world. The US currency remains dominant over other world currencies in the international markets. The behavior of the US dollar has a significant impact on global markets, culminating in both positive and negative results in these markets.

Here are 10 ways the US dollar could affect global markets:

  1. The strength of the US dollar is slowing trade in international markets. A stronger US dollar weakens other currencies in global markets, making dollar-denominated goods more expensive to purchase.

  2. However, these markets will also get enthusiastic if they are exporting to the US. The rise in the dollar causes the value of local currencies to depreciate in these markets, which leads to inflation of local currencies.

  3. When the dollar appreciates against other currencies, demand is shifted from the US market to global markets, thus increasing economic and financial activity in global markets.

  4. The strong US dollar is also attracting capital inflows in foreign direct investment (FDI) and other investments from US dollar investors into these markets. This mostly occurs in developing countries where the markets are emerging markets with high rates of economic growth.

  5. US dollar capital flows into these overseas markets stimulate economic activities such as lending, employment and consumption, thus stimulating growth in these markets.

  6. Commodities such as precious metals and oil are priced in the international market in US dollars. Therefore, the performance of the US dollar determines the cost of living in global markets. The consequences of a weak US dollar in these markets include lower gas prices, while a strong dollar makes gas purchases more expensive for the consumer.

  7. Global financial markets are watching the US dollar closely to ensure the spot price of fast-moving commodities. Any fluctuations in the US dollar lead to a series of buying and selling of these commodities in the context of speculating either of the two outcomes based on the behavior of the dollar.

  8. The rise in the Federal Reserve rate causes the dollar to rise for investors. This could cause capital to flee from these markets; Slowing growth and reducing demand for US dollar denominated products.

  9. Also, higher interest rates can reduce the liquidity of the US dollar and thus reduce investment, leading to job losses and a global recession as happened recently in the 2007 global recession.

  10. As a reserve currency and standard international currency in most countries, the interest rate on the US dollar determines the cost of financing external debt to global markets. The foreign exchange rate of the US dollar determines the interest paid and access to credit in the global financial market while continuing to influence the balance of payments based on the reserves of the US dollar held by the entity.