What actually moves the dollar.
The dollar is the price that quietly sets other prices. Understanding what moves it explains a surprising amount of what happens everywhere else — including in assets that have nothing to do with America.
For research and education. Not financial advice.
The forces that tend to matter
1. Interest-rate differentials
Currencies are, to a first approximation, a question of relative return. If US rates are expected to be higher than those elsewhere, dollar assets pay more, and demand for dollars tends to rise. Note the word expected — what matters is not the rate today but what the market thinks the rate will be, which is why the dollar frequently moves on a central-bank tone rather than an actual decision.
2. Relative growth
Money tends to flow toward economies that are growing. A US economy that is outperforming its peers tends to support the dollar; a slowing one tends to weigh on it. As always, "relative" is the key word — the dollar can rise on mediocre US data if everyone else's data is worse.
3. Risk appetite — the counterintuitive one
The dollar is a safe-haven currency, and something odd follows from that: during a global crisis, the dollar often rises even when the crisis originates in America. When investors are frightened, they buy dollars. This confuses people enormously, and it is one of the most reliable patterns in currency markets.
4. Reserve status and structural demand
A great deal of world trade, debt and commodity pricing is denominated in dollars, which creates persistent structural demand that has little to do with any day's news. This is slow-moving, and it is the backdrop to everything above.
Why you should care even if you never touch FX
- Commodities are priced in dollars — a stronger dollar tends to weigh on them.
- US company earnings from abroad are worth less when converted back at a stronger dollar.
- Emerging markets that borrow in dollars find their debt harder to service when the dollar rises.
- Gold feels it directly (see what moves gold).
The dollar is rarely the story in a headline and frequently part of the explanation. When an asset moves and the stated reason doesn't quite fit, checking what the dollar and real yields did that day is one of the highest-yield habits in market research.
Frequently asked questions
What makes the dollar go up?
Chiefly expectations of higher US interest rates relative to elsewhere, stronger relative US growth, and — counterintuitively — global fear, since the dollar is a safe haven. Structural reserve demand underpins all of it.
Why does the dollar rise during a crisis?
Because investors move to safety, and the dollar is the world's reserve currency. This holds even when the crisis begins in the United States, which strikes most people as backwards the first time they see it.
Why does a strong dollar hurt commodities?
Commodities are priced in dollars, so when the dollar strengthens they become more expensive for buyers using other currencies, which tends to weigh on demand and price. It's a tendency, not a law.
See what the dollar is doing to your holdings.
TRUE connects the macro backdrop to the assets you actually follow.
For research and education. Not financial advice.