Beginners in trade often ask why the US dollar affects the value of many goods in the market. To answer this question, it is important to first understand what a reserve currency is.
Reserve currencies are currencies held by central banks and large financial institutions in very large quantities. These currencies are used for major investments, mass transactions and all aspects related to the world economy.
One of the most prominent reserve currencies in the world is the US dollar. It is widely known for its liquidity and is the currency of America, one of the most powerful and stable economies in the world. Goods are usually valued in reserve currencies. Gold, oil, steel, platinum and many others are valued in US dollars. Often buyers of raw materials use the US dollar to buy various goods. Thus, a sudden change in the price of the dollar may affect a number of goods in the market.
Raw materials and the US dollar have an inverse correlation. If the value of the dollar rises, then the price of raw materials falls, and if the dollar falls, the prices of raw materials increase. An increase in the value of the US dollar indicates that the buyer will have to spend more of their own currency to purchase a certain amount of goods. If goods become more expensive, its demand will fall, which will lead to lower prices.
Each product has its own characteristics. These attributes often affect the price of different goods. But the value of the dollar has a greater impact on commodity prices compared to the various attributes of commodities. Even history has its evidence of an inverse relationship between the US dollar and commodities. In 2014, a significant amount of commodity prices fell when the dollar rose by about 23%.
As a trader it is important to always monitor the price of the dollar and even the aspects that will affect its value. It is well known that commodities and the US dollar are moving in opposite directions. This understanding does not guarantee a specific investment decision, but can help in making sound decisions.
Another reason for the dollar’s influence is that commodities are global assets. They trade all over the world. Foreign buyers buy US dollars such as corn, soybeans, wheat and oil. When the value of the dollar declines, they acquire greater purchasing power because less of their currency is required to buy each dollar.