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About:
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In a foreign exchange market, the price of one currency in relation to another is called the exchange rate. The dollar is one of the only two currencies in the world.
It acts as a reserve against all other currencies. However, the value of the dollar depends on several factors. Among them, geopolitical risks, the economic performance of the United States, and the market psychology.
In the 1960s to the mid-1990s, the Federal Reserve (Fed) intervened in the currency markets. They would buy or sell dollars on behalf of firms. This was in part to avoid a global economic depression. During the Reagan administration, however, the minimalist approach to currency management was abandoned.
While the Fed and Treasury have undertaken monetary policy interventions, the market has been largely ignoring these efforts. Traders have instead bet on a rally in the dollar. That's why the trade-weighted dollar index has pedalled from 122.5 to 130.7 since the Fed announced quantitative easing on March 23.
Demand for the dollar is also driven by foreign investment. Large American corporations issue bonds, which require foreign investors to pay in dollars. For example, a wealthy private investor in the United States may purchase a stock issued by a company in Europe.
In addition, there are other factors that affect the demand for the dollar. For instance, the US economy could weaken and unemployment rates could increase. If these factors occur, the dollar would be worth less in international trade.
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