3 Factors That Drive the U.S. Dollar

The economy’s performance is at the heart of the decision to buy or sell dollars. 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.

Since investors always seek out the highest yield that is predictable or “safe,” an increase in investment, particularly 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.1

With a strong economy, a country can attract foreign capital to offset the trade deficit. That allows the U.S. to continue its role as the consumption engine that fuels all of 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 own economies growing.2

From a currency trading standpoint, when it comes to taking a position in the dollar, the trader needs to assess these different factors that affect the value of the dollar to try to determine a direction or trend.