3 Factors That Drive the U.S. Dollar

3 Factors That Drive 

the U.S. Dollar

When it comes to the decision of whether you should buy or sell dollars, it all boils down to how the economy is performing. A strong economy will attract investment from all over the world due to the perceived safety and the ability to achieve an acceptable rate of return on investment. Investors always seek out the highest yield that is predictable or "safe." Investment from abroad creates a strong capital account and a resulting high demand for dollars.

On the other hand, American consumption that results in the importing of goods and services from other countries causes dollars to flow out of the country. If our imports are greater than our exports, we will have a deficit in our current account. With a strong economy, a country can attract foreign capital to offset the trade deficit. The U.S. can continue as the consumption engine that fuels all the world economies even though it's a debtor nation that borrows this money to consume. This also allows other countries to export to the U.S. and keep their economies growing. This explanation is simplistic, but it illustrates a point. The point is that when it comes to taking a position in the dollar, the currency trader needs to assess the different factors that affect the value of the dollar to try to determine a direction or trend. (Learn more in Understanding The Current Account In The Balance Of Payments.)

Factors Affecting Dollar Value

- The methodology can be divided into three groups as follows:

- Supply and demand factors

- Sentiment and market psychology

- Technical factors