Where Is the Dollar's Value Headed Next?
There are not certain ways to predict the movement of a particular currency, however, there are some few things that can serve as tentative indicators. Even though it is difficult to tell whether the US Dollar, Chinese Yuan will go down or up or euro will rise against the sterling pound ahead of time. Nevertheless, a close analysis of interest rates, economic growth, exchange rates is among variables that give a clue on what is likely to happen.
In the case of the US dollar, its value can be measure in three ways including exchange rates, foreign exchange reserves and treasury notes. However, the most common method being the exchange rate. To be able to predict its next movement it is essential to understand the three indicators to understand where it is headed next.
Source: The Balance 2019 by Catherine Song.
1. Exchange Rates
The dollar’s exchange rate compares its value against other countries currencies. It a quick method to tell the worth of a dollar to a specific currency at a particular time. The U.S. Dollar Index is the popular measurement used to determine its value.
The rate is subject to daily changes because the currencies are bought and sold on the foreign exchange market. There are many factors that affect currency's forex value and this includes the strength of its economy, the country's debt levels and central bank interest rates. When the three ingredients are strong so is the dollar value. Thus, the government can indirectly use these fundamental factors to regulate exchange rates.
Just like the US, many countries use forex exchange to measure their currency value. For instance, the value of the U.S dollar can be shown in comparison to other country’s currencies including as yen, rupee, the pound and Canadian dollar. Bellow is the value of U.S dollar forex value measured since 2012 against the euro.
Euro to Dollar Exchange Rate
Source: Federal Reserve
2. Treasury Notes
The dollar value is strongly connected to the demand of the Treasury notes. The U.S. treasury department sells notes a fixed face value and interest rate. Thus, investors place their bid at a Treasury auction either higher or lower than the face value then resells them to the secondary market. At higher demand, investors pay higher than face value as they accept a lower yield. Conversely at lower demand investors receive higher yields because the treasury notes are bought at a lower amount.
The higher yield implies low dollar demand and thus fall in value. Depending on other factors the demand can shift leading to increase demand and the value of the dollar rises above the face value. For instance, before 2008, the benchmark yield swayed between 3.91% to 4.23% indicating a stable value of U.S dollar among the world currency.
3. Foreign Currency Reserves
Due to higher exports than imports, the U.S government dollar is held in foreign reserves in the countries that import their products. Since the U.S government receives dollar as payment. Most of these countries prefer to hold back the dollar as a way to caution their own currency value. Studies show that China and Japan are the largest holders of the U.S dollar.
Thus, as the dollar declines in value, the U.S reserves in other countries also fall at equal measure. Hence, at times when the dollar value decreases, countries become less willing to stockpile dollars in their reserve. As a result, they convert the dollar into more stable currencies such as pound, euro or even Chinese yuan. This action further reduces demand for the dollar and its subsequent dollar value.
The Value of the Dollar Over Time
Sometimes understanding the past is essential when we need to predict the future trend of events. For us to be able to know where the dollar is headed next let checks its trend for the past years. For instance, between 2002 to 2011 the value of the U.S dollar declined in line with all the three factors. During this period the U.S debt scientifically increased and the foreign holder of the debt was concerned about the decreasing value of the dollar in the Federal Reserve and the U.S government debt repayment would not be less worthy to be done with depreciated dollar.
It is at this juncture that the Fed's quantitative easing program was initiated to artificially strengthen the dollar. The program was initiated to keep interest rates, to reduce the government spending and raise taxes, at the end of the program the economic growth had dampened and investors were less willing to use the dollar instead they preferred adopting diversified portfolio with non-dollar denominated assets.
The program’s positive impacts began being shown up in 2012 when the dollar started to strengthen. The value of the done has risen since then till 2016 began to deteriorate in value and thus changing the US economic growth trajectory. However, from 2017 to early 2019 the dollar weakens again forcing investors to seek safety in other stable currency. For the past six months, there has been that U.S dollar has been seen to take a positive trajectory and the dollar value tend to increase every day.
However, considering the issues facing the global economy including Trump administration's trade war, oil price war and now the coronavirus pandemic it is difficult to tell at a glance the direction the dollar takes next. Now a number of measures are being taken to caution the U.S economy from all the adversities.
The current stagnating world economy, as well as the looming 2020 U.S presidential election, is an unfavorable environment for the dollar's growth. Already, the sudden outbreak of covid-19 "coronavirus" is threatening to tear apart the global economy. Thus, in either away, the dollar value is not safe so to speak.
The Trump's bid for presidential re-election to Whitehouse comes November 2020 is not guaranteed and once a democratic take over the next direction for U.S economic growth trajectory becomes uncertain. Considering that the current White House economic policies such as cutting tax buoying the greenback from the domestic side whereas trade wars were kept biased to strengthen U.S dollar. The continuity of these policies that keeps the dollar in check may not last longer if President Trump is not re-elected and the future of the dollar my succumb economic regression.