The U.S dollar is one of the most important currencies in the world. It not only a recognized global currency but it is also the most reserved currency of the world where almost every country in the world aims to reserve the U.S dollar because of the global acceptance and value the currency with makes it almost equal to gold with is treated as the most valuable commodity.
The importance of the U.S dollar in the global economy is very prominent and thus a constant increase in the value of the U.S dollar tends to put negative effects on the other economies of the world especially the emerging markets takes the biggest hit on the reserves and trade due to exceptionally strong U.S dollar.
Currency the strong U.S dollar due to the increasing confidence of investors on the U.S economy is constantly pushing the value of the greenback on the positive side. The U.S dollar index with measures the strength of the U.S dollar against the basket six major U.S trade partner currencies is continuously gaining the value in the past few months now with created strong positive sentiments for the U.S dollar. In this blog, we will discuss the effect of strong U.S dollar on the emerging markets and Oil exporting countries.
The Reason behind Strong U.S. Dollar
The quantitative easing by the Federal Reserve in late 2009 was the most important influence in the price surge in the U.S dollar. Where the positive movement in the U.S. Dollar started in late 2009 the current developments in the interest rates and monitory policy by the Federal Reserve is continuously supporting the U.S. Dollar by keeping the interest oriented investors attracted towards the U.S. Dollar. The Federal Reserve is now again set to increase the Interest rates in December which is expected to boost the recent bullish trend in the U.S. Dollar index in coming future as well.
However the quantitative easing program with pumped the market with a huge chunk of liquidity resulted in the fall in the U.S dollar with started in the October 2014. To stop this slide in the value of the U.S Dollar the Fed decided to end the quantitative easing program along with positive developments in the monitory policy with healed the U.S Dollar to gain its losing value in recent times and this positive movement in the U.S. dollar is expected to continue in coming future as the Federal reserve and Donald trump administration is all set to support the U.S. economy which will in turn support the value of the U.S. Dollar.
The effect of the strong U.S Dollar on the domestic market
A constant increase in the value of the U.S dollar not only affects the outer world but if also have a strong effect on the domestic market. a strong U.S. Dollar means that the imports for the consumers in home will become comparatively cheaper with adds in the local consumer spending which in turn helps the fed to maintain its expansive monitory policy without working about the inflationary aspect of the economy as the higher consumer spending supports the inflation and keep the federal reserve out of the work of regulating the inflation and put the majority of their energy to add in the economic development o the content which will, in turn, helps the U.S. dollar positively.
However, an exceptionally strong U.S. dollar can affect the economy negatively as well as is a double-edged sword it has the potential to harm the economy if not managed carefully. A strong dollar ensures cheaper imports and affects the exports of the domestic products much more expensive to other countries which hit the exports as the domestic goods become expensive foreign counters shifts their orders to other global competitors which results in a dim in the exports. This downfall in the exports hits the domestic export-oriented companies and this affects the overall gross domestic product of the country negatively with is not a good indicator.
The countries which are basically export-oriented and like Venezuela, Brazil and other suffers the most in the times of a strengthening U.S. Dollar as these countries are a big exporters of commodities like copper if the dollar increases the value of the commodity tends to get affected as the majority of the commodities worldwide as priced in the U.S. dollar itself and an increase in the value of the U.S. dollar results in an increased price of the commodity with makes it expensive and thus it hurts the export of these small emerging export-oriented economies.
In Asian emerging markets like India, Pakistan and China are one of those countries who importers both oil and commodities. Import oriented economies tend to get benefited by the decreased price of commodities due to the increased value of the U.S. Dollar because. India along with China will not only get benefit from the decreased price of the commodities but also the increase in demand for domestic goods with will increase the exports with becomes cheaper for U.S. consumer due to the strong dollar plays an important role in the development of the Asian Emerging Economies.
Oil Export-oriented economies and Strong U.S. Dollar
Saudi Arabia, Iraq, Iran, and Russia are the major oil exporters in the Middle East and as we all know a strong dollar tends to have a negative impact on the price of the Oil. An increase in the value of the U.S. dollar affects the current accounts of all the major organized oil exporting economies as not only it affects the price of cured oil but it also hurts the demand and supply curve. This negative effect of the strong U.S. dollar is affecting the value of oil exporting emerging economies negatively. As the trade deficit widens the economy of the oil export-oriented emending market economics comes under pressure with will result in a sharp fall in the local currency against the U.S. dollar.
The Bottom Line
The U.S. dollar being the global currency affects the global market largely due to its demand and use which makes it a very important aspect of the global economy and when this very important part of the global economy starts to chase the sky there are many parts of the globe which get negatively affected by the increasing value of the most important currency.
However, there are many emerging markets which actually get benefited by the increasing value of the U.S. dollar which is a great influence on trade. It is very important for the investor to track the movement of the U.S dollar and should always consider the local economy and the effect of the rising U.S. dollar as the dollar is all set to start its bull run in the coming years it is now ever important for an investor to place their bids in line with the global currency and local economic structure in order to ensure profitable trading and investment portfolio.