Buying power fluctuates with the dollar.
An almost limitless amount of small economic, political and environmental factors contribute in some way to the value of the dollar. In fact, CurrentTrading.net points out many of these minor contributors in its "50 Factors that Affect the Value of the US Dollar," article. However, many of these less attributable factors are more useful when discussed by category. Ultimately, currency trading by speculators in response to these factors drives dollar value fluctuation.
Trade Balance
CurrencyTrading.net discusses the trade balance factor first. Trade balance refers to the relative balance of importing and exporting by a country and its overall trade surplus or deficit. The United States has operated with a major trade deficit for decades, with Congress agreeing to raise the debt ceiling to $16 trillion as of August 2011. A negative trade balance can prompt global market players to generally steer clear of the dollar, weakening its value.
Political Factors
Government policy and political news also contribute to dollar fluctuation. When government offices or agencies change policies or announce events that impact perception of the US economic state, it affects dollar perception. For instance, the dollar may receive a boost when new government officials take office, if investors perceive the newly elected officials as being pro-business and economic trade. On the other hand, negative developments like "9-11" and other terrorist events cause panic, which typically weakens the dollar. Tax cuts or increases usually cause either pro-dollar or anti-dollar sentiment, respectively.
Fed Policy
When the Central Bank, or Fed members, raise or lower interest rates, it impacts the value of the dollar in the short and long term. Higher rates on currencies mean higher interest yields for businesses and investors that hold that currency. Central Bank leaders meet periodically to address monetary policy. When base interest rates are increased, the dollar gets a boost. Lower rates negatively affect the dollar. An ongoing period of rising or lowering rates tends to coincide with positive or negative trends in the dollar's value.
Supply and Demand
John C. DeMoss of DeMoss Capital points out that currencies are impacted by supply and demand economics like any other product, service or item of value. When economic, political or news events increase perception of the US economic condition, the dollar's value perception typically rises. This increases demand for dollars among countries, businesses and investors. When demand increases relative to available supply, value goes up. On the contrary, when negative events decrease dollar value perception, fewer entities desire to have or hold dollars, decreasing the dollar's value in the marketplace.
Tags: dollar value, businesses investors, Central Bank, dollar value perception, economic political