Skip to content
The US Dollar (USD) is the most traded currency in the world. If you’re a Forex trader, understanding what causes the USD to move can help you make better trading decisions. In this post, we’ll go over the main factors that push the USD up or down, with some real-world examples.
1. Interest Rates and Monetary Policy
The Federal Reserve (Fed), which is the central bank of the United States, plays a huge role in determining the value of the USD. One of the most important tools the Fed uses is setting interest rates. When the Fed raises interest rates, it becomes more attractive to hold USD because higher interest means better returns for investors. On the other hand, if the Fed cuts rates, the USD often weakens because investors can find better returns elsewhere.
Example:
In 2022, the Fed aggressively raised interest rates to combat high inflation. As a result, the USD strengthened significantly against other currencies, like the Euro (EUR) and the Japanese Yen (JPY), because traders moved to the higher-yielding USD.
Key takeaway for traders: When the Fed hints at interest rate hikes, expect the USD to rise. When it signals cuts, expect the USD to fall.
2. Inflation and Economic Data
Inflation is another key factor. When inflation in the US is high, the Fed often raises interest rates to slow it down, which can lead to USD strengthening, as explained earlier. But inflation isn’t the only data that affects USD. Other key economic indicators like Gross Domestic Product (GDP) growth, unemployment rates, and consumer spending also play a role.
When the US economy looks strong based on these numbers, traders tend to buy USD, believing it will maintain or increase in value. On the flip side, weak economic data can cause the USD to drop as confidence falls.
Example:
In the summer of 2023, the US reported strong job numbers and consumer spending. This gave the USD a boost as traders felt more confident about the economy’s strength.
Key takeaway for traders: Keep an eye on US economic reports. Strong data means USD could strengthen; weak data could make it fall.
3. Global Economic and Political Events
The USD is known as a safe-haven currency, meaning that in times of global uncertainty, many traders and investors move their money into USD to protect themselves from risk. This is because the US economy is large and relatively stable compared to others.
Geopolitical events such as wars, elections, or trade agreements can also impact the USD. When things get unpredictable around the world, the USD usually strengthens as traders seek safety.
Example:
During the COVID-19 pandemic in 2020, investors around the world rushed to buy USD as the global economy entered uncertain times. This caused the USD to rally against most other currencies.
Key takeaway for traders: Watch for major global events—whether it’s a conflict, a pandemic, or a shift in trade policy—because they can strengthen or weaken the USD depending on market sentiment.
4. Trade Balances and Export/Import Dynamics
Another important factor that moves the USD is trade balances. The US imports and exports goods and services all over the world. When the US imports more than it exports, it creates a trade deficit, which usually weakens the USD because more USD is leaving the country to pay for those imports.
On the other hand, if the US exports more, creating a trade surplus, it strengthens the USD, as more foreign currency is converted into USD to buy American goods.
Example:
When the US imposed tariffs on Chinese goods in 2018, it led to a reduction in imports from China. This helped reduce the trade deficit temporarily, and the USD saw a boost as a result.
Key takeaway for traders: Pay attention to the US’s trade balance reports. A rising deficit might weaken the USD, while a surplus could strengthen it.
5. Market Sentiment and Speculation
Sometimes the movement of the USD isn’t tied to data or events at all, but to how traders feel about the market. This is called market sentiment. If traders feel positive about the USD, they will buy more of it, which pushes its value up. If they lose confidence in the USD, they sell it, driving the price down.
Speculation also plays a big role. Forex traders often try to anticipate future movements by speculating on what the Fed might do next or how global events will unfold. This speculative behavior can cause the USD to move, even if there’s no immediate reason in the news.
Example:
In early 2023, despite no major economic events, the USD started weakening because traders were speculating that the Fed would stop raising rates soon. As more traders believed this, they sold USD, causing its value to drop.
Key takeaway for traders: Always keep an eye on market sentiment and be aware of what other traders are thinking or speculating. It can move the market even without major news.
Conclusion
There are many factors that move the USD—interest rates, inflation, global events, trade balances, and even market speculation. By staying on top of these drivers, Forex traders can better predict USD movements and make more informed trading decisions.
Keep in mind that no single factor controls the market. It’s the combination of these forces, plus the unpredictable nature of trading, that makes Forex so dynamic and interesting. Keep learning and stay updated with the latest news and data to stay ahead!
