The system methodology of determining the dollar value can be divided into three groups as listed below:-
Supply and demand factors
Sentiment and market psychology
We will now look at each category in detail.
Supply and demand factors
When the United States exports its products and services, it creates a demand for the dollar as its clients and customers need to pay for the acquired services in dollars. For this to work, the customer nations or organizations convert their local currency to dollars by selling their money to buy dollars. When the United States government and other large corporations issue bonds to raise capital, they are then to be purchased by foreign investors. These payments will mandatorily be made in dollars. This is also the case when Non-U.S investors purchase U.S corporate stocks as it would require the foreign investor to sell his local currency to buy dollars and buy those stocks. These are among a few examples of how the U.S creates more demand for dollars which in turn puts pressure for the supply of dollars. This, in turn, increases the value of the dollar relative to other currencies being sold to purchase dollars. The U.S dollar is considered to be a haven during times of economic uncertainty making the dollar persists despite fluctuations in the market.
Sentiment and market psychology of dollar value
When and if the U.S economy weakens, it leads to reduced consumption owing to increased unemployment which could lead to the U.S being confronted with a chance of sell-off. This means returning the cash from the sale of bonds or stocks to return local currency. There is a dampening effect on the U.S dollar when the foreign investors buy their local currency.
Technical factors that impact the dollar
Traders are obligated with the task of determining whether the supply of dollars will be higher than or lesser than its demand for dollars. Through the release of various government statistics like payroll data, GDP data along with other economic information help determine the strengths and weakness of the economy. Incorporation of other significant players in the market such as investment banks and asset management firms help determine the general economic sentiment. In addition to this mixture of prognostication, traders are pressurized with the task of analyzing historical patterns sourced by seasonal factors like support and resistance levels along with technical indicators. Traders believe that these patterns observed are cyclical and can be used to predict future price movements.