10 ways the USD affects world markets


The United States is the strongest and largest economy in the world. The US currency remains dominant over other global currencies in international markets. The behavior of the U.S. dollar significantly affects global markets, culminating in positive and negative consequences in those markets.

Here are 10 ways the USD affects global markets:

  1. A stronger USD slows trade in international markets. A stronger USD weakens other currencies in global markets, making it more expensive to buy dollar-denominated goods.

  2. However, these markets are also excited if they export to the United States. A stronger dollar causes the depreciation of local currencies in these markets, creating inflation of domestic currencies.

  3. When the U.S. dollar gathers against other currencies, demand shifts from the U.S. market to global markets, and thus to increased economic and financial activity in global markets.

  4. A stronger USD also attracts capital inflows into foreign direct investment (FDI) and other U.S. investor investment in these markets. This is mainly experienced in developing countries where markets are new markets with high rates of economic growth.

  5. The inflow of capital in US dollars in these foreign markets stimulates economic activities such as lending, employment and consumption, which stimulates growth in these markets.

  6. Goods like precious metals and oil are quoted in USD on the international market. Therefore, the effect of the USD determines the cost of living in world markets. The consequences of a weaker USD in these markets include lower gas prices, while a stronger USD buys gas more expensively for consumers.

  7. Global financial markets are closely monitoring the USD to determine the spot price of fast-moving commodities. All fluctuations in dollars trigger a series of sales and purchases of these goods in guessing any outcome based on dollar behavior.

  8. An increase in the Federal Reserve rate is causing the dollar to rise in price for investors. This can trigger capital flight from these markets; slowing growth and declining demand for USD-denominated products.

  9. Also, high interest rates can reduce liquidity in USD and consequently reduce investment, resulting in job losses and a global recession such as that recently experienced in the 2007 global recession.

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