Introduction
We live in the world whereby the monetary systems that make the dollar an official reserve currency. For the last five year the dollar has been sliding up and down, and this brings the question; what exactly makes the value of currency to rise or fall? The reason is that price is set minute by minute by traders and investors who make bets on which way the market prices direction of currency. Since the year 2011 the dollar has been rising. The last time the dollar went down was in February 2002 when it fell by 9.5% all the way through to June that is when it increased by 1.8 %.
Discussion on rises and falls in the value of the dollar for the last five years
The value of the dollar measured in three ways the: exchange rates, Treasury notes and foreign currency reserves which are a number of dollars held by foreign countries. Trends in the recent past five years using the three measurements of the showed an increase in the dollar for the last five years. The reasons behind the rise of the dollar are:
1. The dollar is a refuge during any global crisis which means that investors purchase U.S Treasuries to avoid risks as they are trying to avoid whatever happened in the year 2008. In this year there was a severe financial crisis and recession.
2. China's economic reform led to slower economic growth in the year 2015.
3. The European Union is on the verge to boost economic growth through quantitative easing. When that was not happening, investors were worried about Greece depth crisis.
4. Despite china's effort to lay down reforms, it is still it continues to purchase dollars so as to control the value of their currencies. Helps them boost their exports by making them cheaper.
The strength of the dollar has been reversed compared to 2002 whereby it fell though there is a possibility of it falling again due to these three main factors:
The rise and fall of the dollar compared to foreign rates
1.U.S debt is more than $18thrillion, and the foreign holders of the debt are in a worry situation that the federal reserve will allow the value of the dollar to decline so as to make us debt repayment worthless in their own.
2. The massive debt puts pressure on the head of state and the Congress at large on whether to raise taxes or slow spending.
3. Foreign investors prefer to diversify their functions with non-dollar dominated assets.
In the year 2012 the value of the dollar against the euro fell by 10% and later that year in December, it regained its worth, and by then the euro was worth$ 1.2973.
By the end of 2013, the euro was up against the dollar, and it was worth $1.3186. In 2014, the dollar lost value compared to euro. At this point the European Union was finally solving the euro zone crisis at the end of the year, it was up by$1.3779. During 2015 the euro fell, and it was now trading $1.21 against the dollar this was brought about by investors fleeing the euro. In 2016, the euro fell again to $1.05 March but in may it was able to rise again to $1.13 but it, later on, it fell due to Paris attacks in the month of November before that year ending with a value of $1.08(Mishra 2016).
The rise and fall of dollar value measured by treasures notes
The Treasury Department sells records for a fixed interest rates and face value and investors put up at a treasury auction for more or less of the face value and can resell them than face value. Small demands mean investors pay less than face value and receive the higher yield. In 2012 the dollar weakened in early spring but rebound by the end of the year. The ten-year-old Treasury note yield was 3.36% in January, rose to 3.75% in February then fell to 1.89%from December 30th.In 2013 the dollar strengthened significantly as the yield fell in the month of June to 1.443%.At the end of that year, the dollar weakened as the yield rose to 1.78%.In2014 there was reducing on the dollar by a small margin as the yield on the ten-year Treasury increased from 1.86%in the month of January to 3.04% by the month of December 31st.In 2015 the dollar strengthened through the year as the yield on ten-years Treasury decreased to 3.0%, January to 2.17% by the year end. In 2016 the dollar was high in the month of January as the yield on benchmark ten-year Treasury note fell from 2.12%in January to 1.68 % in the month of February, however, the dollar again weekends as the return again rose to 2.28%on demand on treasuries a versus dollars(Eva 2016).
The rise and fall of the dollar measured to currency reserves
The dollar held by foreign governments in their currency reserves they do so because they export more than import and thus they receive payments regarding dollars. The countries that do so find it of their best interest since it keeps their currency values at low level the biggest holders of us dollars are Japan and China. As the dollar decline the value of their reserves also decline. And in such a situation they are less willing to hold dollars in reserve. As per 2016, there was the highest amount in reserves amounting to $4.759 trillion this represents total measurable reserves down from 67% in the year 2011, and since the percentage of the dollar is declining, it means that foreign governments are moving their currencies reserves out of dollars. Research showed that the value of Euros held in reserves compared to dollars increased from $393 billion in 2011 to record a $1.515 trillion. That is despite the eurozone crisis. However, reserves in Euros are less than a third of the amount held in dollars (Scott 2017).
Effects of the dollar on United States economy
The rise of a dollar makes American-made goods more expensive and less competitive compared to the foreign produced goods. The results to decrease in our exports and thus slowing economic growth. This scenario also leads to lower oil prices this is because oil prices are in dollars. When the dollar gains strength, the oil production countries get reluctant on prices of oil because their profit margin in their local currency doesn't get affected in any way (kalian 2017).
Example
In a situation where the dollar is worth 3.75 Saudi riyals. For instance, a barrel of oil is worth $100 which make it 375 Saudi riyals. If the dollar strengthened by a margin of 20% against the value of the riyal and fixed to the dollar has also raised 20%against the Euro. The reason why the Saudis didn't want to limit supply as oil prices fell to $30 a barrel in 2015.
Firm's response to the dollar fluctuations
The exchange rate plays a significant role for companies which export goods and import raw materials for production. While in some situations this statement holds average some studies using the disaggregated data indicates that some U.S companies do not fully pass exchange rate changes through into export prices. The multinationals respond to these conditions in anticipated directions such as in a situation whereby the dollar falls a firm with high foreign sales will have to adjust their production and sales between at home and overseas. These adjustments can be very costly and slow and hence cannot achieve in the short term. I n situation of fall in the dollar companies who rely on raw materials locally can opt to import the raw materials so as not to encounter a lot of costs. In a scenario whereby the dollar fall the cost of exporting goods becomes high hence the companies can target their sale locally to reduce costs (Warnock 2017).
Conclusion
In conclusion, the rise and the fall of the dollar have its advantages and disadvantages. The decline in the dollar is an advantage to the U.S people since they will not have to access goods and services at a high cost but countries that have reserves has dollars will have a disadvantage since the decline in the dollar implies that their reserves will also decrease in value. In situations of such fluctuations, companies should seek alternatives that are less costly e.g. in cases of a rise in the dollar they should balance their imports and exports. Since at this time to ship in bulk as it is when the dollar falls will be very hard. So flexibility is essential.