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A Fistful of Dollars: Why the greenback is so influential on markets

The US dollar is the most popular reserve currency worldwide
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The US dollar has weakened after worse-than-expected economic data from the country. But what does that mean for other foreign currencies linked to the greenback?

"Movements in the US dollar can have a significant impact on other global currencies and markets. Having an idea of how the greenback could perform in the future can prove very lucrative."

US markets suffered a blow last week when new economic data showed the country's performance across key indicators was poorer than expected. Inevitably, the news caused the nation's currency to decline in value against other currencies worldwide.

The US Dollar Index reached an intraday low of 95.19 on Friday (August 12th), which was down more than 0.30% on where it started the day, according to Investing.com. The index had regained some ground by the time markets closed, but the dollar continued to decline this morning and was at 95.61 - down 0.07% - at the time of writing.

So what caused the dollar's downfall? A batch of disappointing data was largely responsible, including flat retail figures, a drop in the pace of consumer spending and a notable fall in the Producer Price Index for Final Demand.

This means the likelihood of the US Federal Reserve hiking the base interest rate in the near future has dropped, which could suppress the dollar's value even further. But what does this mean for wider markets and other currencies? Let's begin with a bit of history lesson.


Why is the dollar's value important?


The dollar is one of the most crucial currencies to global markets, and has been since near the end of World War II. At a 1944 meeting in Bretton Woods, New Hampshire, the world's developed countries formulated a plan to peg foreign currency exchange rates to the US dollar.

The Bretton Woods agreement meant that nations could redeem their US dollars for physical gold. However, when many countries began demanding gold in the early 1970s, the US president at the time, Richard Nixon, made the decision to stop offering this direct convertibility.

In other words, foreign nations could no longer exchange dollars for gold, but the dollar was already the most popular reserve currency worldwide by this time - and it remains a key part of the forex system to this day.


Predicting US dollar movements


Fast-forward to today and movements in the US dollar can have a significant impact on other global currencies and markets. Having an idea of how the greenback could perform in the future can therefore prove very lucrative.

Last week, the dollar was lower against the yen, the euro, and the Australian dollar. Only the pound, which is still suffering the after-effects of Brexit (which you can read about here), lost value against the dollar.

However, there are some important economic events in the calendar this week that could further affect the US dollar. For example, Japan has already released flat GDP growth figures for the second quarter, which could drag down the yen's performance against the greenback.

On Wednesday, the Fed will publish its latest meeting notes discussing monetary policy. The release is often widely anticipated because it gives insights into the central bank's current mood regarding the country's economy and potential actions it may take to remedy problems.

The European Central Bank announces a similar report on monetary policy on Thursday, which gives an indication of how the eurozone is performing in the wake of the UK's EU Referendum.

Which way will the US dollar move this week? Hopefully, you will have a better idea of some of the factors that could affect the currency over the next five days.

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