To understand this concept on what drives the U.S. Dollar, we need to first explore how a relative value of a dollar works, and what it depends on.
What is Relative Value of money?
As per Investopedia, "Relative value is a method of determining an asset's worth that takes into account the value of similar assets. This is in contrast with absolute value, which looks only at an asset's intrinsic value and does not compare it to other assets."
While determining the relative value of an amount of money in one year (the initial year) compared to another (the desired year) is more complicated than it seems at first. There is no single "correct" measure, and economic historians use one or more different index depending on the context of the question.
An index such as the Consumer Price Index is measured as the price of a "bundle" of goods and services that a representative group buys or earns. Over time the bundle changes; for example, carriages are replaced with automobiles, and new goods and services are invented such as cellular phones and heart transplants. These considerations do not stop the fascination with these comparisons or even the necessity for them. For example, such comparisons may be critical to determine appropriate levels of compensation in a legal case that has been deferred. The context of the question, however, may lead to a preferable measure other than the real price (real wage, or real cost) as measured by the Consumer Price Index (CPI), which is used far too often without thought to its consequences.
Sourced: Elements
Therefore, when talking about the (relative) worth of an item, it should be categorized as a commodity, a project, or an observation of compensation or wealth. Then (and only then) should it be measured relative to well-defined indexes of economic activity that put the item in perspective. This process will generate specific definitions of relative worth that depend on the index used and the type of item it is.
Now lets focus on how U.S. Dollar is against other currency's?
(Sourced: The New York Times)
The value of the U.S. dollar is the strongest it has been in a generation, devaluing currencies around the world and unsettling the outlook for the global economy as it upends everything from the cost of a vacation abroad to the profitability of multinational companies. The dollar lubricates the global economy. It is one side of about 90 percent of all foreign exchange transactions, accounting for $6 trillion in activity every day before the pandemic, from tourists using their credit cards to companies making major international investments. The dollar lubricates the global economy. It is one side of about 90 percent of all foreign exchange transactions, accounting for $6 trillion in activity every day before the pandemic, from tourists using their credit cards to companies making major international investments.
As the world’s most important currency, the dollar often rises in times of turmoil, in part because investors consider it to be relatively safe and stable. The dollar has gained in recent months as inflation has soared, interest rates have increased and the worries over growth have worsened. “That’s a pretty tough mix,” said Kamakshi Trivedi, the co-head of a market research group at Goldman Sachs. The main way to gauge the dollar’s strength is by indexing it against a basket of currencies of major trading partners like Japan and the eurozone. By that measure, the dollar is at a 20-year high, after gaining more than 10 percent this year, a huge move for an index that typically shifts by tiny fractions each day.
What weakens the U.S. Dollar?
(Sourced: Investopedia)
Currency depreciation, in the context of the U.S. dollar, refers to the decline in value of the dollar relative to another currency.
Easy monetary policy by the Fed can weaken the dollar when investment capital flees the U.S. as investors search elsewhere for higher yield.
Declining economic growth and corporate profits can cause investors to take their money elsewhere.
After exploring the U.S. Dollar, do you think we should have stayed with the Gold Standards, to be continued....
By: Sunny Wadhwani
September 11th, 2022
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