When starting a business, often ask why the US dollar affects the prices of many products in the market. To answer this question, one must first understand what a reserve currency is.
Reserve currencies are currencies that the central bank and large financial institutions hold in very large quantities. These currencies are used for large investments, huge transactions and all aspects related to the global economy.
The US dollar is one of the most significant reserves in the world. It is widely known for its liquidity and is the currency of the United States, one of the strongest and most stable economies in the world. The products are usually valued in reserve currency. Gold, oil, steel, platinum and many more are priced in US dollars. Often, product buyers use US dollars to purchase a variety of products. Thus, a sudden change in the value of the dollar can greatly affect different products in the market.
There is an inverse relationship between goods and the US dollar. If the dollar rises, commodity prices fall, and when the dollar falls, commodity prices rise. The appreciation of the US dollar indicates that the buyer will have to spend more on their own currency to purchase the product in certain quantities. As the products become more expensive, the demand for them will decrease and so will the price.
Each thing has its own unique characteristics. These characteristics often affect the price of different products. The dollar value has a higher effect on the price of the product than the various features of the product. There is even evidence of history with the inverse relationship between the US dollar and commodities. In 2014, a significant number of products fell when the dollar appreciated by about 23%
As a trader, it is important to always look at the price of the dollar and the aspects that will affect it. Common sense that commodities and the US dollar are moving in opposite directions. This insight does not guarantee a specific investment decision but it can guide reliable decision making.
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Another reason for the dollar’s impact is that commodities are a global asset. They trade around the world. Foreign buyers buy American products such as corn, soybeans, wheat and oil with dollars. They have more purchasing power when the dollar depreciates because they need less currency to buy each dollar.
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