There has been quite a bit of attention of late regarding the US dollar and its standing as the leading “world exchange currency.” The general understanding of the US dollar’s power, however, can be a bit overwhelming from a general investor standpoint. After all, we in the United States just use this piece of paper for exchange of goods and services. We rarely use it as a barometer of economic activity. How can this seemingly plain piece of paper affect the investments we make?
Although this description of the dollar’s power and influence could become a book, there are just a few areas where its real effect for investment activity is more immediate. First, one must understand that it’s valued at so many units as gauged against another currency. In this sense, an investor may buy and sell another currency (in US dollars or another currency) in hopes of the that currency, or the US dollar, rising or falling. Any variation would yield a profit or loss. This is very risky, but a way that large profits can be made or lost in seconds.
The US dollar can also affect the commodities market in much the same way as trading dollars for another currency. In a general way, commodities are much the same as paper or coin currency with a dollar value unto themselves. If a commodity is in short supply, its value goes up – meaning it is worth more paper currency. In this way one might understand that the value of that paper currency, as it relates to other paper currencies, changes the value of the commodity in direct relation to the value of the paper currency. This may be complicated for the average investor but it does actually make sense if it is left to thought. This general principle also relates to basic metals, which actually have a very large bearing on the world economy as a whole.
This is where the “rubber meets the road” when it comes to the US dollar. The US dollar, in world terms, is regarded as safe for investment. The US dollar exists based on the trust that it will always have value. This economic point is extremely key to the concept of monetary value. Money flows around the world based on this trust and can be seen more directly in the trillions of dollars that other countries have invested in the United States. As these foreign investments in the United States increase or decrease, other investments rise and fall.
Gold is about as close to the US dollar as an investor can get and a direct example. If other investors or countries are investing less in the US dollar, they are more likely investing in gold or another currency. Generally speaking, this means events, business conditions or other events are affecting market conditions, which directly affects the US dollar.
Overall, the market watches the US dollar for its cues. US dollar up may mean commodities down as investors find more profit in investing in the US dollar. With the US dollar down, oil, gold and other opportunities are more profitable. As an investor, playing the dollar is not for the faint of heart (and should be considered very carefully with the aid of a register investment advisor); however, it can be very profitable and an indicator of areas where other investments may lead to profit.