Today, USD is used as a reserve currency by central banks around the world and is also a major traded currency in global markets. USD is also considered the main source for international markets of goods. Additionally, outside the US, it is the official currency in some other areas.
As the USD is global, many factors have influenced its rates. This is why it fluctuates every day and quite significantly too. So the volatility level is high. When the USD is strong relative to other currencies, its value will increase; when it is weak relative to other currencies, its value will decrease.
As fluctuations are frequent and the USD is the major currency around the world, today we will talk about how the biggest changes in the currency rate impact the world’s economy.
USD role in world’s economy
The USD plays an important role in the global economy, serving as a reserve currency and as a benchmark for other currencies. Start with the countries. In addition to the US, USD is also the primary currency in Ecuador, El Salvador, and Zimbabwe. There are also a number of countries where the USD is used as a secondary currency, including Canada and Australia.
The top sectors worldwide that are fully dependent on USD rates are the financial sector, the energy sector, and the commodities sector. These sectors rely heavily on USD-denominated assets and transactions to function properly. For example, most international oil contracts are priced in USD, so a rise in USD rates can lead to higher oil prices. Similarly, a fall in USD rates can lead to lower commodity prices. This is why these sectors tend to be very sensitive to changes in USD rates.
A large portion of the world’s businesses is dependent on the USD rate. In the trading sector, we can include online trading too where the most impact is on the FX market. As it is about trading with foreign currencies, the dependence on USD rates is essential. It is the primary that determines most of the trader’s potential as well as revenues.
For businesses, a weakening of the USD could make US exports more expensive and less competitive in global markets. There are many multinational companies that are based in the United States and whose operations are denominated in U.S. dollars. These companies include Coca-Cola, McDonald’s, IBM, and Walmart. Mostly, revenue amounts of them are dependent on the USD rate. A strong dollar makes their products more expensive for consumers outside of the United States and reduces their profits when translated back into dollars.
A strong USD has a number of impacts on the world economy. First, it makes international trading expensive, especially exports. This can lead to a decline in demand for US products and a consequent decrease in production and employment.
Secondly, a strong USD also makes imports into the US cheaper, which can lead to inflationary pressures as imported goods become more affordable relative to domestic goods. Finally, a strong USD can also lead to capital outflows from other countries as investors seek higher returns in the US market. This can put pressure on other currencies and exacerbate economic imbalances around the world.
Examples of strong and weak USD currency impacts on the world’s economy
The USD rate was the strongest in early 2020. After starting the pandemic, it started depreciating as other major or toxic currencies.
The strong USD rate during the Covid-19 pandemic has made imported goods more expensive for countries with weaker currencies. This has led to inflationary pressures in some countries and may have contributed to the economic slowdown. Secondly, the strong USD has also made US exports more competitive, which has benefited American companies. Finally, the strong USD has made it difficult for emerging market economies to repay their dollar-denominated debt, putting them under further strain.
On the other hand, we have an example of the recession of 2008 which was caused in part by the depreciation of the US dollar. This led to a decrease in demand for US exports, as they became more expensive for other countries to purchase. In addition, this made it more difficult for Americans to travel abroad and discouraged foreign investment in the United States.
It significantly changed actions in the world’s economic sector. The biggest impact was on trading where export prices rose enormously and became very expensive. This led to a decrease in demand for US products and an overall decrease in economic activity. The ripple effect of this was felt throughout the world as other economies also slowed down due to reduced trade with the US.
In 2022, USD faced significant depreciation. According to the previous examples, experts predict increasing prices and economical problems in price politics till the end of 2022.
Sources:
- https://www.axiory.com/trading-resources/basics/forex-trading-for-beginners
- https://corporatefinanceinstitute.com/resources/knowledge/finance/2008-2009-global-financial-crisis/
- https://reliefweb.int/report/zimbabwe/zimbabwe-key-message-update-steep-depreciation-local-currency-driving-price-spikes-reducing-food-access-july-2022
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