WHAT DETERMINES THE STRENGTH OF THE US DOLLARS TO OTHER CURRENCIES?
Many investors would be fond of trading dollars rather than preferring other currencies as it has been recognized as the world's reserve currency. In several countries the U.S Dollar has been crowned as their official currency. In this modern world, around 80% of the global trade is performed with US Dollars. But do you know how the US Dollar emerged as the world's reserve currency and what are the factors that determined it?
Now, in this blog we'll discuss the above mentioned queries that help you to understand the evolution of US Dollars in the global market.
HOW US DOLLAR EMERGED AS WORLD'S RESERVE CURRENCY?
As the U.S is backed by the world's largest gold reserves, other countries started to accumulate reserves of U.S Dollars instead of gold reserves. Hence, in order to store their dollars, countries had to purchase U.S treasuries to store their money safely. During the period of Vietnam war, the demand for U.S treasuries deficit by flooding the market with paper money.
The stability of the dollar has been a rising concern and countries chose to convert dollar reserves into gold. Later, the demand for gold surged up that forced the President Richard Nixon to de-link the dollar from gold. Although there have been periods of stagflation, the U.S dollar remains the world's reserve currency.
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Here, we'll now discuss about the essential criteria that determines the strength of the U.S Dollar:
INFLUENTIAL FACTORS OF U.S DOLLARS:
1. INTEREST RATES:
Offering higher interest rates would help an investor to choose to invest in that country for higher returns. Thus, by providing higher interest rates the country promotes strong currency. But certainly this has weakened the U.S Dollar valuation except for the fact that interest rates around other major currencies are also low.
2. ECONOMIC POLICIES:
Every nation would have imposed its monetary policies to improve the economic growth and currency value, and to overcome the fiscal problems. Tight fiscal discipline and anti-inflationary monetary policies have been adopted to promote the strength of the U.S Dollar.
Stability is the important factor where governments seek for their currencies more than their strength. An investor would consider this factor as it would help them to learn the governments law and history of constructive economic policies that were adopted to regain its stability. In fact, most of the commodities are traded in U.S Dollars.
4. SUPPLY VS DEMAND:
When U.S exports a products or services, there would be a surge in demand for dollars as the customers are allowed to purchase the products or services through dollars. Henceforth, this will force the customer to exchange their local currency for dollars to purchase the product. This replicates how the U.S creates more demand for dollars by increasing the value of dollar against the local currency at the time of supply.
TRADING WITH DOLLARS:
When you trade with dollars you can enjoy the benefits of making your trade easier by allowing you to invest in U.S treasuries and other global stocks. Trading with currencies is easy but always sell your local currency when it posses greater value than previous days.
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