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How does the falling US dollar affect world economy?

Team Veye | 31 Aug 2020

How does the falling US dollar affect world economy?

The market value of the U.S. dollar has an impact on every segment of the economy, including the stock market. The relationship between currency valuations and the stock market is complex, though.

While a strong dollar is synonymous with falling equity prices, the general opinion is that a stronger dollar is likely to be both market and economic positive.

Historically, the stock market is known to perform better during dollar bull markets than dollar bear markets and have posted gains every year following years when the dollar appreciated.

The strength of the U.S. dollar is reflected in the U.S. dollar index (USDX), which is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.

As with all currencies, the U.S. dollar fluctuates on the basis of supply and demand in the currency market. Since it is the world's most commonly used currency, its movement can affect all kinds of businesses worldwide.

The falling U.S. dollar helps certain countries which are a net importer of goods priced in U.S. dollars. It can also benefit U.S. businesses exporting to Australia. Australia's exports of commodities such as iron ore and coal are priced in USD and traded on international markets. So, Australia, which is a net exporter of goods priced in U.S. dollars, the effect is not quite positive.

With the current trend of U.S. dollar depreciating continuing, economists believe that if prolonged, this could depress Australia's GDP growth to some degree in coming years

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