US Currency Guide: United States Dollar (USD)

What does USD stand for?

USD is the official abbreviation for the United States dollar.

USD News

• USD: No safe-haven bounce
• USD: T-minus two months
• USD: Six-month high for US dollar

Why does the US dollar move in value?

As the strongest and most traded currency in the world there are many influences on the dollar. Some are under the control of policymakers – either the US Federal Reserve or the US Treasury – but most day-to-day movements are governed by global events.

1. Monetary policy: Actions of the US Federal Reserve (see below) to increase or control the money supply.
2. Other central bank policies: There are two sides to any currency pair and the actions of the Bank of England will affect USD/GBP, the actions of the European Central Bank will affect USD/EUR, and so on.
3. Economic data: Currency traders analyse the daily flow of economic data to make judgements on whether to buy or sell US dollars, and this will in turn strengthen or weaken the dollar. Economic data can include economic growth (GDP), employment (e.g. non-farm payrolls) and prices (inflation). See USD News, above, for more details on how today’s news is affecting the US dollar.
4. Business optimism: Analysts and currency traders will try to pre-empt economic data by looking at surveys of business optimism. For example, the Purchasing Managers’ Index (PMI) is a measure of whether businesses see market conditions improving, staying the same or worsening.
5. Global risk sentiment: As the world’s strongest currency the US dollar is regarded as a safe haven for investors against global problems. For example, in the Covid-19 pandemic or during President Trump’s trade wars with China, the US dollar strengthened, and then weakened as tensions eased.

About the US dollar

The dollar was created in 1785 and the first notes printed in 1861, featuring Abraham Lincoln and coloured green, hence the nickname “Greenback”.

After the US departed the gold standard in 1973 (the system under which paper money could, in theory, be exchanged for its value in gold) the US dollar became effectively the currency of the world.

Several currencies are fixed, or “pegged” to the US dollar. These include the Bahamian Dollar, Bahraini Dinar, Barbados Dollar, Belize Dollar, Bermudian Dollar, Cayman Islands Dollar, Cuban Convertible Peso, Djibouti Franc, East Caribbean Dollar, Ecuador Sucre, Hong Kong Dollar, Jordanian Dinar, Lebanese Pound, NL Antillian Guilder, Omani Rial, Panamanian Balboa, Qatari Rial, Saudi Riyal, United Arab Emirates Dirham and Venezuelan Bolivar.

Control of USD

The US dollar is a floating exchange rate against most currencies, which means that it finds its level according to supply and demand on the currency markets.

While the actions of the Federal Reserve (“The Fed”), which is independent of the US government, have most influence over the strength of USD via its control of interest rates, the US Treasury Department also has an influence. It can print and spend more money, which increases the money supply and tends to weaken the dollar. However, higher government spending, lower taxes and other stimulus measures for the economy can also strengthen the dollar by encouraging growth in the economy.

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The Federal Reserve and monetary policy

www.federalreserve.gov

Chair: Jerome Powell

The US Federal Reserve’s task, as instructed by the US Congress, is to promote maximum employment in the USA, stable prices, and moderate long-term interest rates. It does that primarily by setting interest rates and by increasing or decreasing the money supply. Inflation, as measured by the personal consumption expenditures price index (PCEPI) is intended to be no higher than 2%.
Interest rates are voted on by the 12 members of the Federal Open Market Committee (FOMC) at eight meetings per year. See the calendar here.