The United States dollar (USD), which is probably the closest we get to a universal currency, is also a barometer of global economic health. Learn more now.
The U.S. dollar (USD) is not only the currency of the United States, but it is also the currency for at least ten other countries that enjoy having the security of the USD as their currency. After World War II, most global currencies were pegged to the dollar, which was itself pegged to gold, and while many countries allowed their currencies to float, there are still currencies that remain pegged to the greenback. A number of the commodity producers, particularly oil, find it convenient to have their currency pegged to the dollar for the stability this provides. Popular American holiday destinations, such as Bermuda and Barbados and a number of others, are also pegged to the dollar for the income certainty it provides in respect of the very important tourist trade from the U.S.
The US Dollar Index
The U.S. dollar index (DXY), which is calculated by factoring in the rate of exchange of six major world currencies; the euro, Canadian dollar, Japanese yen, Swedish krona, British pound, and the Swiss franc, against the USD was started in 1973 with a base of 100 and is relative to that base. The DXY goes up when the dollar strengthens in value compared to the other currencies and the historical DXY can illustrate the performance of the USD over an extended period. The fluctuation of the DXY makes it a suitable underlying asset that binary trading brokers would typically offer their customers as it provides potentially profitable trading opportunities. The question of how the USD has performed so far in 2015 can thus be easily ascertained by looking at a 12 month DXY chart. What are more important are the reasons behind the changing values which tell us not only how the dollar has performed, but it also shows the factors that have driven that performance.
The Beginning of 2015
Firstly, we will take a look at the numbers, and the charts tell us that the DXY opened the year on the 2nd of January 2015 at 90.75, rising steadily to peak at 100.375 on the 13th of March. The low point for the year was reached on 15 May when the DXY read 93.1666, with a three month peak at 97.9583 on the 5th of August. This was followed by another drop in value to a low of 93.25 which was touched on 24 August. The index again rose to 96.333 before dipping to 93.7916 on 15 October. Since that date, the dollar has been pretty much been on an upward curve to peak at 100.291 on the 30th of November. The index fell slightly to stand at 98.75 on 7 December. Based on these movements, the USD has thus performed well overall for the year, with the DXY index up by 9.25%.
We will now have a closer look at the underlying reasons for how the dollar performed.
The U.S. Economy
As early as March of this year, CNN Money reported that the USD was enjoying its fastest rise in value in 40 years as it strengthened dramatically against all the world’s major currencies. The dollar’s rise was explained as being the direct result of America’s strong economy while most other parts of the world were facing economic difficulties. China, Japan and most of the EU countries have struggled for most of this year to stimulate their flagging economies while the U.S. has surged ahead.
On 14 December 2014, one euro would have cost you $1.25117, while on 8 December 2015, the same one euro would cost you only $ 1.08333 and this was after the USD had earlier strengthened to 1.05124 against the euro on 3 December. These numbers mean that the USD has appreciated against the next largest currency in the world by 13.41% as an indication of how well the USD has performed in 2015.
The U.S. second quarter GDP growth of 3.7% was a major factor underpinning the USD strength as was a steady decline throughout the year in the numbers of unemployed in the country. The unemployment rate started out in January 2015 at 5.7% and by October, this had dropped to 5% which was maintained in November. Economists vary about the number that can be defined as full employment, with the consensus being that an unemployment rate of between 4.6% and 5.5% actually implies full employment of the workforce.
The U.S. Federal Reserve
The continual speculation about an increase in the interest rate by the Federal Reserve has been another factor that has resulted in the USD strength. The only factor that has deterred the Fed appears to be the low inflation rate that has been prevalent for much of the year while Fed officials are looking at an inflation ideal of 2% before they can feel comfortable with an increase in the rate. The USD value has spiked before each of the Fed monetary committee meetings during 2015 and then held onto some of the gains which it made on speculation of a hike in interest rates.
The Final Word
Another factor aiding the dollar has been the quantitative easing that both the European Central Bank and the Bank of Japan have put into practice in 2015. At the same time, in the U.S., the Fed is planning a rates hike, which is the exact opposite, driving the dollar higher against those currencies which are an important part of the major currencies basket. While the US dollar has performed well in 2015, most analysts seem to be of the view that the USD will continue its upward momentum going into 2016.