Why the dollar matters to every trader
The US dollar is one of the world's principal currencies and is involved in a large proportion of foreign-exchange transactions. Gold, oil and many other commodities are priced in US dollars, so movements in the dollar can influence prices across multiple markets.
For traders in the UAE, the dirham is pegged to the US dollar at approximately AED 3.6725 per USD. As a result, the dirham generally moves alongside the dollar against other currencies, while its exchange rate against the dollar remains anchored to the peg.
The main drivers of the US dollar
Interest rates and the Federal Reserve. This is usually the most powerful driver. Higher US interest rates make dollar assets more attractive to global investors, increasing demand for the currency. What matters most is the gap between US rates and those elsewhere, and how expectations for that gap change. Fed statements, projections and press conferences can move the dollar as much as the rate decision itself.
Economic data. Strong US jobs, growth and spending figures tend to support the dollar because they raise the chance of higher rates. Weak data tends to do the opposite. As with most markets, the reaction depends on how the figure compares with expectations.
Inflation. Higher-than-expected inflation can strengthen the dollar in the short term if traders expect the Fed to respond with tighter policy. Over longer periods, persistently high inflation can erode a currency's purchasing power.
Safe-haven demand. In times of global stress, investors often seek dollars and US Treasuries for their liquidity, which can lift the currency even when the trouble has nothing to do with the US. See our safe-haven assets guide.
Trade and capital flows. Foreign investment into US stocks and bonds increases demand for dollars; money leaving the US reduces it. Over time, trade balances also play a role.
Fiscal and political factors. Government borrowing, debt ceiling disputes, elections and questions over central bank independence can all affect confidence in the dollar.
The US Dollar Index (DXY) explained
The US Dollar Index measures the value of the US dollar against a basket of six major currencies. The euro has the largest weighting in the basket, so movements in EUR/USD often correspond with movements in the opposite direction in the DXY. However, this relationship is not guaranteed, as other currencies and market factors can also influence the index.
Currency |
Weight in DXY |
|---|---|
Euro (EUR) |
57.6% |
Japanese yen (JPY) |
13.6% |
British pound (GBP) |
11.9% |
Canadian dollar (CAD) |
9.1% |
Swedish krona (SEK) |
4.2% |
Swiss franc (CHF) |
3.6% |
How dollar moves ripple through markets
- Currency pairs. When the dollar strengthens, pairs where it is the quote currency, such as EUR/USD and GBP/USD, tend to fall, while pairs where it is the base, such as USD/JPY and USD/CHF, tend to rise.
- Gold. Gold is priced in dollars, so a stronger dollar often weighs on it, although safe-haven demand can override this.
- Oil and commodities. A stronger dollar makes commodities more expensive for buyers using other currencies, which can soften demand.
- Emerging markets. Countries and companies with dollar-denominated debt can come under pressure when the dollar rises.
How traders typically follow the dollar
The following describes common market practice and is not a recommendation.
- Tracking the calendar. Fed decisions, inflation reports, the monthly jobs report and GDP releases are among the events traders watch most closely. See the GivTrade economic calendar.
- Comparing central banks. Because currencies trade in pairs, traders often compare the outlook for the Fed with that of the European Central Bank, Bank of Japan or Bank of England.
- Checking the index and the pairs together. Looking at the DXY alongside individual pairs can help show whether a move is broad dollar strength or driven by the other currency.
- Watching bond yields. US Treasury yields often move with expectations for Fed policy and can signal dollar direction.
Key risks
Currency markets can move sharply around data releases and central bank announcements, and spreads may widen. Stop-loss orders are not guaranteed and may fill at a worse price. Leverage magnifies both gains and losses, and positions held overnight usually incur swap charges.
Trading Currency CFDs with GivTrade
GivTrade offers CFDs on major currency pairs, gold and other markets through the MetaTrader 5 platform, subject to the applicable product specifications and account terms.
Account features, minimum deposits, commissions and overnight charges vary according to the selected account and applicable conditions. Swap-free arrangements, where available, are subject to the relevant terms.
Please consult GivTrade's current account terms and product specifications for complete information on applicable costs and trading conditions before making any decision.
Frequently asked questions
Why do interest rates affect the US dollar?
Higher US rates increase the return on dollar assets such as Treasury bonds, attracting global capital and raising demand for the currency. Expectations of lower rates tend to have the opposite effect.
What is the US Dollar Index (DXY)?
It measures the dollar against six major currencies: the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc. The euro carries the largest weight.
Why does gold often fall when the dollar rises?
Gold is priced in dollars, so a stronger dollar makes it more expensive for buyers using other currencies. Safe-haven demand can sometimes outweigh this effect.
How does the dollar affect the UAE dirham?
The dirham is pegged to the dollar at 3.6725, so it rises and falls with the dollar against other currencies such as the euro and pound.
Risk warning
Trading CFDs on margin involves a high level of risk and may not be suitable for all investors. Leverage can magnify both gains and losses, and market prices may change rapidly. Depending on the applicable contractual terms and client protections, losses may be substantial. Clients should ensure they understand how CFDs operate and carefully consider their financial circumstances and risk tolerance before trading.
This article is for general informational and educational purposes only. It does not constitute investment advice, a personal recommendation or an offer to buy or sell any financial instrument. Past market behaviour is not a reliable indicator of future results.