The US dollar is the most important currency in the world: it’s the most-traded currency globally, and is the primary reserve currency worldwide. However, trading in USD can expose your budget to risk. This means you need to make sure that you’re fully aware of how the rate can change and what you can do to protect your budget.
How is the US dollar regulated?
The Federal Reserve (‘the Fed’) is the central banking system responsible for managing monetary policy, including stabilising prices and moderating long-term interest rates.
Where is the American dollar used?
As well as being the currency of the United States, it’s also official in Ecuador, El Salvador, East Timor, the Caribbean Netherlands, Palau, British Virgin Islands and the Turks and Caicos Islands. There are also a number of currencies ‘pegged’ to the USD (meaning they have a fixed exchange rate which follows fluctuations in the US dollar). Pegged currencies include the East Caribbean dollar, Lebanese pound and the Hong Kong dollar.
Not only that, but many other countries and regions also commonly accept dollars for payment, like Costa Rica, Honduras and Mexico. This is due to the heavy American influence in the region.
Finally, the US dollar is also the standard money for trading in gold and petroleum. That said, in March 2018, China launched the first futures market priced in Chinese renminbi – so the future could look very different.
What affects the US dollar exchange rate?
If you’re exchanging money to or from USA dollars, it’s important to understand what makes the exchange rates change.
If the Federal Reserve raises interest rates, then you can expect the value of the dollar to increase, as more foreign capital flows into the system. Low interest rates, on the other hand, aren’t so attractive to hold onto as they won’t gain much value long-term, so will see the dollar lose value.
On the other hand, if US inflation increases, the dollar will normally fall in value, due to a perception of instability.
You also need to take into account the balance of payments. If the US has a deficit – i.e. its imports are worth more than its exports – the dollar can sometimes fall in value.
Rising government debt can lead to a fall in value, as high levels of debt make it more difficult for a country to acquire foreign capital. This can mean that foreign investors sell their bonds, increasing supply in the currency and thereby devaluing it.
Speculation can cause big changes to the dollar. Investors will buy more of the currency if they think it’s about to rise in value, and will sell if they think it’s going to drop. Investors buying leads to an increase in demand and therefore a growth in value – while the opposite happens when they sell.
Instability can knock investor confidence, causing them to sell dollars. A single Tweet or statement from Donald Trump can and has caused the market to move – so it’s important to keep fully up to date.
With so many factors affecting it, no-one can truly say where the American dollar will be in the future – not even the banks. That’s why it’s so crucial to consider how to control the risk of changing exchange rates when transferring money to or from US dollars.
How does a changing USD exchange rate affect me sending money overseas?
The rates changes by the minute, if not the second – have a look at our live exchange rates to see how fast the movement is.
This means that, if you’re sending money overseas, you need to be very careful. Imagine that you make a large dollar purchase in pounds – for example, a $200,000 house. The GBP-USD exchange rate will move between you putting in the offer and making a payment. Imagine you put in an offer on the 16th April 2018. You would have expected to pay £139,800. In just a week’s time, on 24th April, you would have found yourself paying £143,240. In other words, you would have lost almost £3,500.
How can I protect my money?
Fortunately, it is possible to protect yourself from that loss, no matter which currency you’re buying USD with or selling USD for. At Smart Currency Exchange, your personal trader can use a forward contract to safeguard your budget. This means that you can lock into a specified exchange rate – so you have the peace of mind of knowing exactly how much you’ll be paying when you transfer American dollars.
Read about the latest news affecting US dollar exchange rates
Our daily market update is written by our currency experts and contains the latest information on how much US dollar exchange rates are fluctuating and compares how it is performing against the British Pound, Euro and other global currencies.
Our writers have been featured on Forbes magazine, in the national press and in the Guardian to name just a few but you can get access to this information completely free by visiting our daily currency news online.
Speak to a currency expert about your US dollar transfers today on 020 7898 0541. We’d be happy to provide the latest summary on how the US dollar is performing and answer any questions you may have on your payments.
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