Added: 02/16/2006 |
US dollar exchange rate is a value of the US dollar against the currencies of other countriesOil prices relative to world currencies are now at unprecedented lows, as shown by a price analysis that incorporates the effect of exchange rate dollars on the value of oil. A commodity-based analysis corroborates this exchange-rate analysis. The value of oil today on world markets is even below its 1969 level (the nadir of the previous oil bust). The inflation-corrected price of oil (using the producer price index) in the US has increased 130% since 1969.However, the US dollar has lost over 40% of its value relative to G-7 currencies since abandonment of the Bretton Woods agreement in 1971. Therefore, the real value of oil an international markets is 20% below its 1969 level. Since 1988 alone, the dollar has lost 16% relative to the G-7 currencies. Oil producing countries are taking extreme revenue cuts caused by the eroding US dollar.
The US dollar exchange rate refers to the value of the US dollar against the currencies of other countries. Among other things, it helps determine how much USA pay for imported goods and services and how much USA receive for what USA export.
When the value of the US dollar falls, imported goods become more expensive, and USA tend to reduce the volume of our imports. At the same time, other countries will pay less for some of our products and that will tend to boost export sales.
The US dollar exchange rate plays a particularly important role in USA economy because, compared with other countries, imports and exports are a relatively large part of USA's economy. USA has a floating US dollar exchange rate. The US dollar exchange rate is affected by supply and demand for US dollars in international exchange markets. If demand exceeds supply, the value of the dollar will go up. If the supply exceeds demand, its value will go down.
Several factors influence the supply of, and demand for, dollars. If interest rates are higher in USA than in other countries, investors may choose to invest in USA, increasing demand for the dollar, provided that the expected rate of inflation is not higher in USA than among their trading partners. If their inflation rate is higher, investors are less likely to prefer USA even with higher interest rates because of the expectation that the value of the dollar will be eroded by inflation.
Their trade balance also affects their dollar. If world prices for what USA export rise in comparison with the cost of USA imports, they will be earning more for their exports than they pay for their imports. The more favourable these "terms of trade," the more demand there will be for the US dollar.
If investors are confident that the USA economy will be strong, they will be more likely to buy USA assets, pushing up the dollar's value.
Together, interest rates and the exchange rate determine the monetary conditions in which the USA economy operates. Changes in the exchange rate affect spending and demand in the economy just as changes to interest rates can either increase or decrease the level of economic activity.
The Bank of USA influences the exchange rate.
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