Us Dollar Movements In 2008 Essay Example for Free

Us Dollar Movements In 2008 Essay The U. S dollar is the most widely used currency in the world in terms of trade and foreign exchange reserves. The US dollar is susceptible to many factors e. g. political, economic as well as financial market forces and therefore fluctuates overtime (Intercontinental Exchange Inc, 2009). The assessment of the movements in the US dollar is tracked by the US Dollar index USDX which is basically a chart showing the value of the US Dollar against the major world currencies. These major currencies are the EUN (EUR), Japanese Yen (JPY), Sterling pound (GBP), Canadian dollar (CAD), Swedish Kroner (SEK) and the Swiss Franc (CHF). The dollar index is calculated as a geometric progression weighted average of the six currencies rates against the US Dollar value relative to 1973 (base year) when the index was launched. Therefore this means that the current rate of the US Dollar index shows the average dollar value compared to 1973 which is the base year (Intercontinental Exchange Inc, 2009). Factors affecting US dollar Index over the past one year The performance of the US dollar against the basket of other major currencies (which form the biggest chunk of US trading partners) as measured by the Dollar Index is affected by many factors key among them economic, political and even financial market news. Therefore the trend in the dollar index can be an indication of the state of the economy and financial market. Economic factors The state of the US economy and the major countries around the world affects the movement of the dollar against world major currencies. An example is an economic indicator like home sales. In April this year, the home sales done released indicated that the home sales were higher than predicted. This news boosted the dollar against major currencies hence moving the dollar index previous recorded levels as witnessed in the figure 1 below (DeCarbonnel, 2009). In late 2008, the subprime mortgage crisis resulted in lack of liquidity in the financial markets which led to the credit which as we know today. The dollar index increased during this period as a result of declining factors in the financial market. The other factor that has affected the dollar index over the past year is the widening US deficit resulting from the continued borrowing by way of selling US treasuries. The US government uses the funds to fund war in Iraq and Afghanistan among other pressing issues. The US deficit has substantially grown over the recent past to an extent that the countries debt ratings were at risk. Currently the US debt rating is Aaa according to Moody’s. The fear of credit rating downgrade reduced the value of the dollar against major currencies (TheLFB-Forex, 2009). Financial factors The ballooning current account deficit was a result of buying US securities by foreign investors but now with the dollar threatening the domestic currencies of these nations they have been forced to sell off the US held assets and this will definitely affect the price of the dollar. The deficit also has the effect of weakening the dollar value and thus affects the movement of the dollar index (Randall, 2009). The selling off of treasuries will also affect the dollar in that the government will be forced to print the equivalent dollar amount if they lack a buyer in order to honor the pledge made in the treasuries. The other factor that has affected the dollar index is the continued acceptance of gold in place of the dollar. The increase in the price of gold leads to a decline in the value of the dollar. Inflation as a result of pumping a lot of money into the economy may lead to high demand for commodities e. g. gold as explained earlier on, the higher the price of gold the lower the value of the dollar as shown in figure 2 (marketoracle, 2009). The other factor that may have played a bigger part in the trend witnessed of the US dollar is that of lack of confidence wit the US dollar as the major foreign reserve currency. In fact some countries like China and Brazil are contemplating establishing a currency that is more stable. Lack of confidence is shown by the wayward performance of the dollar index. Political factors The domestic problem in the US i. e. economical and social programs announced by the new president, stimulus package, bailout of banks and also companies, programs such as Troubled Asset Relief Program (TARP), war in Iraq and Afghanistan are just some of the factors that have pressurized the value of the US dollar. All these programs need resources which are basically raised by selling treasuries (marketoracle, 2009). Conclusion The movement witnessed in the dollar index over the past one year has not only been attributed to the above mentioned factors but also due to the market fundamentals which keep on changing from time to time although to a large extent, the dollar index has been affected by the credit crisis in the financial market which has led to the slowing down of the world economy.Figure 1. (marketoracle, 2009) Figure 2. (marketoracle, 2009) References DeCarbonnel, E. (2009, January 2nd). Ten Major Threats facing the US Dollar in 2009. Retrieved May 26th, 2009, from market skeptics: http://www. marketskeptics. com Intercontinental Exchange Inc. (2009, May 25th). US Dollar Index Futures. Retrieved May 26th, 2009, from Intercontinental Exchange Inc: https://www. theice. com/productguide/ProductDetails. stripes? specId=194 marketoracle. (2009, May 24th). Stock Market Trend Confusion and US Dollar crackdown. Retrieved May 25th, 2009, from marketoracle: http://www. marketoracle. co. uk/Article10869. html Randall, F. W. (2009, May 21st). Gains from the Greenbacks pain. Retrieved May 26th, 2009, from Barrons: http://online. barrons. com/article/SB124285469500340755. html TheLFB-Forex. (2009, May 09th). Dollar Index Review: Post Stress Test. Retrieved May 25th, 2009, from TheLFB-Forex. com: http://www. TheLFB-Forex. com