Three Economic Factors That Affect the Value of the USD When Forex Trading

by Trading 101     Sep 05, 2019

The United States Dollar (USD) is by far the most important currency on the Forex trading sphere; according to expert estimations, the USD backs about half of the volume of trades on the Forex. Long seen as a currency that can withstand any amount of poor economic conditions, the USD is one of the strongest reserve currencies in the world, and is even considered the default reserve for most trades. However, despite its strength, there are still a number of factors that can affect the power of the dollar. Understanding what factors can contribute to a decline or increase in the USD can be crucial for predicting the right Forex trading movements that will result in more profits and less loss. Three of the most important contributors to the value of the USD are as follows:

Gross domestic product. The gross domestic product (GDP) of a nation is the total value of all the goods and services that are currently held within the borders of a country. That is to say, if suddenly every product or skill was suddenly sold, the GDP would be the amount of money that that country would have. A high GDP is an indicator of a strong economy; naturally, if more goods and services are being produced, this means that there is more of an economic need for production and thus products are being sold (whether domestically or internationally). On the opposite hand, a low GDP corresponds to a lower dollar value because it means that, when compared to other countries involved in the Forex trading sphere, the USD is representative of an economy that is not flourishing as well. The GDP of the United States heavily influences the value of the dollar.

Unemployment rates. The unemployment rate of a nation is calculated as a percentage, and asks the following question: of all of the adults in a nation who are currently seeking employment, what percentage cannot find a job? A high unemployment rate can be detrimental to the value of the dollar because it signifies weak economic movement. Think about it this way; if fewer people are employed, they are less likely to want to spend their money on nonessential items, which can cause a ripple effect to larger industries as those industries lose profits. High employment rates lower the value of the dollar and weaken its value when Forex trading because it signifies that there will be fewer goods and services sold within the borders of the United States, at least until the unemployment rate drops again.

Inflation rates. Inflation rates are less a factor that contributes to a decrease in the value of the dollar as they are a symptom that the value is falling, but they are important nonetheless. Inflation is a general rising of prices; for example, the price of a gallon of gas in 1950 was about 18 cents, while today the national average is around $2.50. When prices rise, consumer's money buys less, which decreases the overall power of the economy as everyone looks to tighten their budgets. When inflation rates are at their highest, expect the value of the USD and its power when Forex trading to remain low.

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