The U.S. dollar is the most powerful currency in today’s global economy, driving the majority of international trade. Most cross-border commerce transactions are conducted in U.S. dollars and prices for key commodities such as gold and oil are listed in U.S. dollars on the international market. The greenback is also the leading reserve currency in the world, so much so that the majority of U.S. banknotes are actually held abroad.
The prominence of the U.S. dollar imposes sizable impacts on the economies and financial policies of other countries. Recent turmoil surrounding U.S.-China trade relations, Eurozone instability regarding Brexit and currency crises in South America have put a spotlight on foreign exchange markets and currency politics — especially on how swings in the U.S. dollar exchange rate spark significant changes in a number of foreign economies.
Net Commodity Exporters
The U.S. dollar and the price of commodities share an inverse relationship. Commodity prices usually fall when the dollar rises. Because many commodities are valued in U.S. dollars, buyers have to spend more dollars to purchase those goods. Meanwhile, buyers holding other currencies get more bang for their buck in the currency exchange and can spend fewer dollars. That’s why a strong dollar generally decreases demand for commodities, while a weaker dollar increases demand.
A good example of this dynamic is the oil market. Net oil exporters such as Saudi Arabia, Iran, Iraq and Russia take an economic hit when the value of the dollar increases because oil prices decrease. This can also cause those countries’ currencies to drop as the market loses confidence in their economic outlook.
On the flip side, countries that primarily import commodities benefit when the dollar is strong because a more valuable dollar means less expensive goods from overseas. Coincidentally, the U.S. is the world’s largest net importer, so a strong dollar is extremely helpful in keeping the costs of goods low for American businesses and consumers.
The dollar’s ability to dictate commodity prices has an even more profound effect on developing economies that rely on exports to drive their economies. This is the reason countries such as Chile (which relies on $33.9 billion worth of copper exports each year) suffer when commodity prices decline with a rising dollar.
Emerging economies are also usually cash-strapped, making it difficult for them to obtain resources and otherwise invest in growth-related activities. These countries commonly borrow funds internationally, often in U.S. dollars. If the dollar rises, these countries face steeper repayments as it takes more of their own currency to repay the debt.
Currencies Pegged to the Dollar
In a similar vein, some countries tether their currencies to the dollar in an effort to inject economic stability. By letting the value of their currencies rise and fall with the dollar, foreign governments such as Belize and Djibouti can avoid hyperinflation, which tremendously deflates the value of money and increases prices a thousandfold, as was the case in Venezuela in 2018.
Others, including Bahrain, Qatar, the United Arab Emirates and Saudi Arabia, peg their currencies to the dollar because they deal heavily in dollar-valued commodities such as oil.
In addition, most countries that tie their currencies to the dollar have a solid exporting relationship with the United States, allowing them to maintain a steady supply of dollars for their own central bank reserves. This, in turn, allows them to purchase U.S. treasury bills and earn interest on those dollars, doubling the benefits.
Popular Vacation Destinations
Many Caribbean islands also peg their currencies to the dollar since they receive the majority of their revenue from American tourists. Despite this seeming stability, changes in the dollar can still induce economic volatility in these countries and other common getaway spots.
U.S. travelers enjoy a favorable exchange rate as their dollar goes further. A country that relies on tourist dollars may start losing business under a weakened dollar. This is especially true if its currency is stronger than those of other travel destinations as vacationers may opt to go where they can do more with less.
The U.S. dollar exerts more influence on the global economy than any other currency, and the effects of dollar fluctuations are far-reaching. Trading in such an unpredictable environment can be tough, but TIOmarket’s features and tools can help simplify the process.