The United States Dollar is one of the most volatile currencies on the planet. Do you know why? Especially after the Coronavirus pandemic, this volatility has risen to a great extent. The financial experts believe that this pandemic situation, a swinging US Economy, and a rising USD money supply are weakening USD more than the remaining currencies. So, indeed the volatility of this US currency is changing the market value in the US economy.
Keep reading till the end to get the right answer…..
Tracking The Dollar’s Value
The CPI or Consumer Price Index determines the US dollar value by the services and goods it purchases. With the decline of dollar value, the cost of living rises. The key role of the exchange rate is to determine what the dollar’s value is at any specific time in the overseas markets.
The table below depicts the decline in dollar value starting from 1913 to 2020.
|Year||= $100 (1913)||Notes|
|1913||$100||The first measurement of inflation|
|1920||$197||End Of world war I|
|1930||$175||The Great Depression|
|1950||$240||2nd World War Inflation|
|1960||$299||Lower inflation from the recession|
|1970||$386||Enhanced inflation fro, deficit spending|
|1980||$794||End of the gold standard|
|2000||$1722||Expansionary monetary policy for dealing with 2001 recession|
|2020||$2634||Covid pandemic situation|
How is the US Dollar Measured in 3 Different Ways?
The US dollar is assessed in 3 different ways: Treasury notes, foreign exchange reserves, and exchange rates. Nevertheless, the most common method is Exchange rates, but you have to be familiar with all the 3 for accurate calculations. Let’s check each of them in the section below:
1. Exchange Rates
The exchange rate of the dollar compares its value to the foreign country’s currencies. To be precise, it helps you determine how much of a specific currency you can exchange for a single dollar. This is why the most popular measurement method of the exchange rate is the U.S. Dollar Index.
2. Foreign Exchange Reserves
Foreign governments hold the US dollars in their currency reserves. This is another most important factor affecting its value. What they mainly do is pile up the dollars since their export value is more and receive dollars as payment. China and Japan are some of the largest and noteworthy holders of U.S. dollars. These countries find that sticking around the dollars would ensure that the currency value is lower.
3. Treasury Notes
Treasury notes are another factor to measure the value of US paper money. The dollar moves in synchronization with the demand of Treasury notes. The U.S. treasury department sells notes for a definite face value and the interest rate. Furthermore, the investors bid at the Treasury auction for the face values more or less. Then, they resell them on the secondary market.
How Dollar Impacts the US Economy?
Now that you have understood how the chronology of the Dollar’s value changes and its measurement ways, let’s get straight to the point. There is a deep connection between the US dollar and the US economic market value. But what does it mean to a common person?
While the dollar value reduces, the import prices get higher. This is one of the crucial reasons while gas and oil prices rise rapidly worldwide. Moreover, a diminishing dollar makes the trips overseas costlier, although it facilitates the U.S. manufacturer’s export. This is because their products cost less in foreign countries.
With the increasing strength of the U.S. dollar, American commodities have become less competitive than foreign goods. As a result, U.S. exports slow down while economic growth also lowers. Eventually, the oil prices get lower only because oil transactions are in dollars.
Here is a suitable example in order to explain this. For instance, let’s assume the dollar value is $3.75 Saudi Riyals. Then, an oil barrel worth $100 will be worth 375 Saudi Riyals. Now, if the dollar value rises by 20% in terms of the Euro, the Riyal’s value would also rise by 20% against the Euro. Hence, for purchasing French pastries, Saudis can pay less than before as the dollar has become stronger.
This is the foremost reason why Saudis do not need to check the supply as the prices of oil fell to $30/barrel in 2015.
The Final Takeaway
Recent currency and resource market trends depict that the instability of the dollar’s value has uplifted across the globe. This was more evident as soon as President Trump took office in 2016 and also during the 2020 recession. Through this entire time period from 2016 to 2020, the US dollar value has weakened significantly, which has caused a number of economic disturbances as well. Undoubtedly, it also gave a blow to the economic market value which we have explained above.
I hope how US Currency is changing the economic value is now crystal clear to you. Do you have any further questions? Drop them in the comment section if you have any; we will definitely try our best to clarify them.