Why Does the U.S. Dollar Fluctuate?
The U.S. dollar is a key currency, not only at home but also abroad. Because the price of the dollar fluctuates, economic trends are impacted. Analyzing the dollar's price movements will help you to better understand the global economy, foreign currency exchange, and public policy.
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Basics
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The U.S. dollar is traded on the foreign exchange market; the dollar changes in price relative to other national currencies such as the Japanese yen, the British pound, and the euro.
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Significance
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One of the major reasons for changes in the price of the dollar is the supply of money. The Federal Reserve Bank is chiefly responsible for how many dollars are in circulation, and having relatively more money in the financial system can mean a lower price for the greenback.
Function
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The dollar also functions by responding to changes in key interest rates. In general, lower interest rates will cause the price of the dollar to fall; such a "loose money" policy encourages domestic bank lending but makes the U.S. a less lucrative place for foreign investment.
Effects
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A weak dollar generally makes U.S. manufacturers happy, since exports made with cheaper dollars can be sold overseas for a bigger profit margin. By contrast, a rising dollar policy can become necessary to fight domestic inflation, or prices rising relative to income.
Considerations
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Because of the high level of economic integration, or trade between different nations, dollar prices are affected by many different things. This means that U.S. policy and economic circumstances are only part of the picture; other countries' policies and economies also have a major impact on the dollar's changing price.
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- Photo Credit "capital" is Copyrighted by Flickr user: iChaz (Charlie Ambler) under the Creative Commons Attribution license.
