What Is the United States Dollar Rate?:
The U.S. dollar
rate tells you the dollar's value
compared to another currency. Since the dollar is the world's reserve currency
, most businesses, government officials and travelers around the world need to know the exchange rate
between their own currencies and the dollar. That's especially important for contracts that are priced in the dollar, such as gold
. In addition, nearly half of the world's international transactions are priced in dollars.
U.S. travelers also need to know the dollar exchange rate before they go on an international trip. Even though most foreign businesses take dollars if necessary, they charge a higher exchange rate. Of course, the cheapest dollar rate is with your credit card. Therefore, pay for almost everything you can with your credit card, and you will get the best U.S. dollar rate.
The dollar rate is of vital interest to foreign exchange traders. Most of these work for businesses that seek to hedge their exposure to foreign currency volatility. This risk occurs because the businesses either get their supplies internationally, export to foreign markets, or have offices or plants in other countries. Hedging means they are protecting these transactions from exchange rate changes that could damage their profitability.
The fastest growing group of forex traders seek to profit from the currency trade alone. One way it to buy a currency that they think will appreciate against the dollar. Once the currency grows in value, they trade it back for more dollars than they paid for it. There have been times when enough traders thought a currency would rise, increasing demand and actually forcing the currency to increase in value.
Another strategy is to borrow in a currency that charges low interest rates, and investing in a currency that pays high interest rates. For years, many traders did this with yen. This was known as the yen carry trade. The bank of Japan encouraged this, because it kept the value of the yen low. This allowed Japanese manufacturers to underprice their exports.
What Affects the Dollar Rate?:
The dollar rate is affected by many factors. One is supply
and demand. Since the dollar is the world's reserve currency, it's automatically in higher demand than other currencies. This has allowed the U.S. to sell a lot more Treasury notes
, increasing supply, without suffering from higher interest rates. As a result of this increased fiscal stimulus, the U.S. economy was very strong until the 2008 financial crisis
The dollar rate is also affected by the strength of the U.S. economy, which is considered the most powerful in the world. That's why the dollar rate actually strengthens during any global crisis. Even though decisions made in the U.S. caused the financial crisis, investors flocked to the dollar because it was seen as a safe haven. The same thing happened in the summer of 2001 and 2012, as investors fled from the euro during the eurozone debt crisis.
Another factor that affects the dollar rate is the interest rate paid on U.S. Treasuries. Usually, the lower the interest rate paid, the less demand. However, given that the dollar is a safe haven in an uncertain world, the Treasury is able to pay a low interest rate and still receive high bid prices. This allows the U.S. to run a larger debt. Other countries must pay higher yields to renew their debt.
The large U.S. debt-to-GDP ratio would normally reduce the dollar rate. Until the financial crisis, the more the debt grew, the faster the dollar's value fell. However, this is not as much an impact as long as the dollar is being treated like a safe haven.
Dollar Rate in India:
The rupee plummeted to an all-time low in August 2013 of 68.80 to the dollar. This 25% plunge in 2013 is literally fueling inflation, since imported oil is paid for with ever-more-costly dollars. This comes at the same time India's
economy is slowing, leading to fears of stagflation
. India also has a very high current account deficit, which means it borrows and buys more from overseas than it saves and exports. Investors began pulling out when the Federal Reserve announced in May it would begin tapering its Quantitative Easing program. This drove up U.S. interest rates, strengthening the dollar and making the U.S. the better investment. (Source: India Times, Rupee Closes at Fresh All-Time Low
, August 28, 2013)
Euro Dollar Rate:
The euro to dollar conversion
has depended primarily on the strength of the European Union's economy. In 2007, it surpassed the U.S. as the world's largest economy
. As the success of the EU grew, so did the value of the euro. Between 2002-2008, the euro rose 63% against the dollar. It has fallen since then, first because the European Central Bank raised interest rates prematurely, sparking fears of a double-dip recession. It fell even further once the eurozone debt crisis
called into question the future of the eurozone itself. However, it strengthened in 2013 as it looked like the worst was over. For more, see Euro to U.S. Dollar Conversion and History
Dollar Rate to the British Pound:
Since the 2008 financial crisis, the British pound fell 30%, from $2.10 to $1.40. Expansive monetary policy
increased supply, keeping downward pressure on the currency. In 2012, it strengthened slightly to around $1.50-$1.65. However, the fears that the eurozone debt crisis
would hurt British exports, and further slow its economy, keeps the pound at the lower limit of this range. (Source: This Is Money, Sterling Outlook
, July 2012)
Canadian Dollar Rate:
The Canadian dollar, known as the loonie, has traded in a narrow range of $.80 to $1.01 against the U.S. dollar since the 2008 financial crisis. Both currencies are seen as safe havens compared to the euro and other riskier investments. However, in 2013 the Canadian dollar fell to $.95, as its economy weakened slightly, and the dollar strengthened.(Source: Bloomberg, Canadian Dollar Rises Against Other Currencies
, August 28, 2013)
Yen Dollar Rate:
In 2013, the yen weakened significantly as Prime Minister Abe expanded the money supply
to boost economic growth. In January, a dollar was worth 86.72 yen. By August, it was worth 97.66 yen. This continues a long-term weakening trend, as the dollar was seen as a safer haven during the recession. Although the yen is also a safe haven, against the euro especially, the Japanese economy has been fundamentally weaker. It is plagued by a 200% debt-to-GDP ratio, deflation, and an aging workforce. These are seen as worse problems that those affecting the U.S. economy. However, whenever economic trends in the U.S. look worse, the yen strengthens as the world's #2 safe haven currency. (Source: Daily FX, Yen Rallies
, July 19, 2012) Article updated August 28, 2013
U.S. Dollar FAQ: