Does the Value of the Dollar Really Matter?

US dollar

The value of the U.S. dollar is quoted daily on wall Street and even used by some politicians as a way of assessing America’s strength around the world. But considering that currency values are always in flux and dependent upon the relative value of another currency, does the actual value of the U.S. dollar really matter?

There are four major segments of the stock market – equities, bonds, currencies and commodities. In general, there’s a pattern that these assets follow. When bonds’ prices rise, so follows equity prices and currency prices, while commodity values fall and vice versa. So if currency values are all just part of the natural cycle, the U.S. dollar shouldn’t hold a special place in the markets. But as it happens, the dollar is followed not just by U.S. investors, but by investors all around the world.

The U.S. Dollar as a Benchmark

While currency values fluctuate relative to one another on a daily basis, the U.S. dollar is arguably the one investors pay the most attention to. For one, the dollar is the benchmark upon which most other currencies are measured. Backed by the full might of the United States, it’s viewed around the world as a safe haven currency with multiple countries owning billions of dollars worth of U.S. treasuries and other U.S.-based assets.

Regardless of how other currencies are performing, the dollar is seen as a stable currency and can be a source of wealth preservation during difficult economic times. When the economy of Greece collapsed and the European Union tried everything it could to stabilize its financial system, interest rates dropped to negative values and the Euro become a poor investment. The dollar on the other hand, was far more stable.

Because the dollar is ubiquitous throughout the globe, commodity values are generally based off the dollar. This creates an inverse relationship – when the dollar is strong, commodities are weak and when the dollar is weak, commodity values are high. Commodities are used as a safe haven instead of the dollar when its value is relatively low.

So for commodity traders, the value of the dollar is very important in order to know when to buy or sell different commodities. But, while the value of the dollar might be important, it doesn’t matter whether the value is high or low.

On a macroeconomic scale, the dollar is often used for political reasons. A strong dollar means that U.S. money goes further when it comes to importing goods and services. The higher the relative value of the dollar, the cheaper foreign goods become. But it also makes American manufacturing weaker, since it means consumers in countries with a weaker currency have to spend more in order to buy American goods. That’s what makes a weak dollar good for the manufacturing base. There can’t be both a strong national currency and a strong export industry, since those relationships are inversely related.