The greenback is the lifeline for global markets. Any changes observed in its value are crucial for investors round the globe due its diverse implications. A strong Dollar is generally a sigh of relief for investors and experts as it fuels high economic activity in the US and globally. A greenback rally can both be a good sign and an alarming signal depending on where the rally stems from and who it affects.
Generally, currency appreciation can mean a dip in net exports. As many international currencies are pegged to the USD, a rise in USD impacts these foreign currencies as well and has further consequences on their economies too. It is interesting to note that the greenback has earned its reputation despite the United States being in copious amounts of debt with an economy seeing high levels of deficit spending. Being a debtor nation has not impacted the US’ financial market strength.
A currency rally is especially significant for investors as it impacts not only the commodity market but also the money and equity markets. Here is a closer look at the causal factors behind a rally in the greenback. While a USD rally may seem like a period of high growth and increased economic activity, investors must also be cautious of a currency rally. Commodities have an inverse relationship with USD movements.
This means that a USD rally generally tends to pull commodity prices down. A strengthening dollar can also be good news for stock market investors as it allows them to churn in higher profits from their overseas counterparts. However, often a greenback rally receives a mixed response from experts as it has the potential to wreak havoc in the financial markets. Emerging market currencies can plummet, affecting the dollar denominated debt of the corresponding countries.
