10 Ways the USD Affects World Markets

The United States is the strongest and largest economy in the world. The US currency remains dominant over other global currencies in international markets. The behavior of the US dollar significantly impacts global markets, culminating in both positive and adverse consequences in these markets.

Here are 10 ways the USD affects world markets:

1. A stronger USD slows down trading in international markets. A stronger USD weakens other currencies in global markets, making it more expensive to buy dollar-denominated commodities.
2. However, these markets are also enthusiastic if they export to the United States. The stronger dollar causes local currencies to depreciate in these markets, creating inflation of national currencies.
3. When the USD rises against other currencies, demand shifts from the US market to global markets, which increases economic and financial activity in global markets.
4. A stronger USD also attracts capital flows in foreign direct investment (FDI) and other investments from USD investors to these markets. This is mostly experienced in developing countries where the markets are emerging markets with high rates of economic growth.
5. USD capital inflows into these foreign markets stimulate economic activities such as lending, employment, and consumption, thereby stimulating growth in these markets.
6. Commodities such as precious metals and oil on the international market are quoted in USD. Therefore, the performance of the USD determines the cost of living in world markets. Consequences of a weaker USD for these markets include lower gasoline prices, while a stronger USD makes gasoline more expensive for the consumer to purchase.
7. Global financial markets monitor the USD closely to determine the spot price of fast-moving commodities. Any fluctuation in the USD triggers a series of sales and purchases of these commodities on speculation of either outcome depending on the behavior of the dollar.
8. An increase in the Federal Reserve rate makes the dollar more expensive for investors. This can trigger a flight of capital from these markets; slower growth and reduced demand for USD-denominated products.
9. Additionally, high interest rates can reduce USD liquidity and consequently reduce investment, resulting in job losses and a global recession like the one recently experienced in the 2007 global recession.
10. As the reserve currency and standard international currency in most countries, the interest rate of the USD determines the cost of financing external debts for global markets. The US dollar exchange rate determines the interest paid and the accessibility of credit in the global financial market, while also having an impact on the balance of payments based on the US dollar reserves held by an entity.