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Why Dollar is appreciating in value

Why Dollar is appreciating in value?


By Dr. Lalit Kumar Setia |  @drlalitsetia  |  drlalitsetia@gmail.com  |  October 13, 2018 11:45 a.m. IST

How countries finance their requirements?

Let us explore the causes behind the rise in value of the Dollar. When a country requires money, there are two major sources used all around the world i.e. either impose taxes & increase user charges to fill the basket of treasuries at government level or to take debt from open market, banking companies, non-banking financial companies and lenders. In case, the country decides to raise money through open market, it is required to pay interest rate to the public or investors. More the interest rates, more the investors come ahead to finance the country. Now-a-days, the United States set the interest rates to continue rising and this is being considered as a major cause of rise in the value of Dollar. The United States is issuing bonds with higher rate of interest and in order to buy the bonds, the foreign investors require Dollars. The foreign investors buy dollars and then make payment for purchasing bonds and it rises the value of Dollar.

Demand of Currencies:

Secondly the demand of currency i.e. Dollar is rising due to the performance of an economy using it. For example, the United States’ performance attracts the investors from around the world. The more the performance, more the chances of returns or profits from the investments. The investors always seek highest yield from their investments. A strong economy is always trusted by the investors and this time due to performance of United States going up, the investors are demanding Dollars to invest in the country. The demand and supply of Dollar is fluctuating the rate of Dollar.

Role of Foreign Institutional Investors:

The Foreign institutional investors (FIIs) also affect the demand of the currencies. It depends upon the performance of the countries, returns from the investments, and potential of growth; that the FIIs be attracted. For example, during the year 2017-18, the Asia remained worst performer, it made the FIIs not to invest in Asian countries and the rupee be depreciated, which further lead to increase in current account deficit of India and other Asian countries.

Sentiments of Investors:

Thirdly the sentiments of the investors towards the improving performance of the country. The investors are constantly monitoring the decision of administration working under control of the President Donald Trump. The decisions are seemed to be autocratic but enough to generate more revenues and make the economy of United States stronger in financial terms. Due to improvement in the financial performance of United States, the investors are looking positively to the economy and investing in the companies & government of United States.

Imports and Exports of a Country:

Fourth, the imports and exports of a country. Suppose, the United States starts to export more goods and services then it will be required to pay for the goods and services coming from the United States. The payment is required to be made in Dollars. The Dollars will have to be bought first then payment will be made to the United States. The conversion of other currencies into Dollar will rise the rate of Dollar.

Speculators' intervention on bases of technical factors:

There are speculators known as traders who always intervene to gain maximum profit from the rise or fall in the value of currency. Whenever, the statistics are released by Government on various factors like Gross Domestic Product (GDP), Industries indexes, and other economic factors, if they represent a strength in the economy, the traders or speculators start buying the currency for selling it on higher rates. On the other hand, if the statistics represent a weakness in the economy, the traders or speculators start selling the currency in advance to encash their profits by buying the currency on lower rates in near future. Such interventions also benefiting the Dollar now-a-days. The panic over the investors, create a benefit to the traders or speculators.


*Copyright © 2018 Dr. Lalit Kumar. All rights reserved.

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