The United States is the strongest and largest economy in the world. The US currency remains dominant in international markets over other global currencies. The behavior of the US dollar has a significant impact on global markets and leads to both positive and negative consequences in these markets.
There are 10 ways the US dollar can influence world markets:
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The strong US dollar is slowing down trade in international markets. The strong US dollar weakens other currencies in global markets and makes it more expensive to buy dollar-denominated goods.
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However, these markets are excited if they export to the United States. The strengthening of the dollar leads to the depreciation of local currencies in these markets, creating inflation in national currencies.
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When the USD rises against other currencies, demand shifts from the United States market to global markets, thereby increasing economic and financial activity in global markets.
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The strong US dollar also attracts capital inflows to foreign direct investment (FDI) and other investments from US dollar investors in these markets. This is particularly the case in developing countries, where markets are emerging with high economic growth rates.
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The inflow of capital in US dollars to foreign markets stimulates economic activities such as lending, employment and consumption, and thus stimulates growth in these markets.
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In the international market, commodities such as precious metals and oil are quoted in US dollars. Therefore, the performance of the US dollar determines the subsistence level in world markets. The consequences of the weakening of the US dollar for these markets include lower gas prices, while a strong US makes it more expensive for consumers to buy gas.
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Global financial markets are closely monitoring the US dollar to determine the spot price of fast-moving commodities. Any fluctuations in the USD lead to a number of sales and purchases of these commodities in the speculation of both outcomes based on the behavior of the dollar.
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An increase in the Federal Reserve’s discount rate makes the dollar more expensive for investors. This can lead to capital flight from these markets; slowing growth and declining demand for US dollar-denominated products.
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Also, high interest rates can reduce the liquidity of the US dollar and subsequently reduce investment, resulting in job losses and the recent global downturn in the 2007 global recession.
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In most countries, the interest rate of the US dollar as a reserve currency and a standard international currency determines the cost of financing foreign debt for global markets. The foreign exchange rate of the US dollar determines the interest paid and the availability of credit in the global financial market, while still affecting the balance of payments based on the US dollar reserves held by the organization.