Notes From a Fundamental Analysis of the USD

 With regards to the USD as a time series, application of a non-linear measurer directly defines the present situation of the currency. Volatile markets and rising interest rates keep authorities looking for answers; more predictability would aid in solving financial mishaps in the shorter-term. To study the movements of the USD and to forecast future movements, analysts prepare a fundamental analysis of the USD compared to other currencies.

 As a matter of fact, the trade weight, or pegged value of the USD against other currencies establishes the USD's appeal in the global markets. Everything's changing. In a basket of currencies, the USD still stacks up in comparison to the Mexican Peso, Singapore Dollar, and over twenty other currencies. Traders recognize the USD's compatibility in liquid markets; the high frequency of EUR/USD exchange states the currency's outstanding liquidity in the markets.

 Illustrating the tradeability of the USD under current market conditions, a fundamental analysis highlights the USD's performance in the millennium. From continent to continent, the USD impresses investors.

Fixed Exchange Rates

For most import economies, fixed exchange rates peg the value of one currency to another currency to support monetary policy in both economies. The USD counters the Euro, but provides a base currency for trade with the British Pound. Under a fixed regime, the USD delivers liquidity in the global economy. Politics, however, set the limits for the currency.

At the domestic level, one import economy exchanges with another import economy easily. Nothing has to be difficult. Particularly, the USD/CAD exchange functions to aid in deflation; both importers maintain the value of their currencies through the strong support of Gross Domestic Product. However the capital flows, the rate of exchange for 1 USD to 1 CAD situates the currencies among other currencies in a basket. Although the volume of the USD/CAD exchange does not match the frequency of the EUR/USD exchange, the USD/CAD trade occurs to assist the government in implementing economic controls.

Here, interest rates come to light. Before the USD exchanges for the CAD, the Federal Reserve sets the interest rate according to economic factors; the interest rates indirectly affect the fixed exchange rate for the USD. When the authorities establish interest rates for treasury bills and other financial instruments a guarantee from the Federal Reserve covers the life of the bill; although fluctuations occur as time moves along, both variable and fixed interest rates are backed.

In the here and now, the U.S. operates as a small open economy. Considering the size and availability of the USD, authorities implement controls like interest rates to protect the integrity of the currency. 

The Trade Weighted USD

Since Bretton Woods, a broad currency index measures the trade weight of the USD most accurately. Choosing the "broad" measure instead of the "real" numbers allows analysts flexibility in interpreting the value of the USD. Again, constant change in the financial markets render authorities and analysts to a state of unpredictability. It goes that the broad measure reveals a closer picture of current market conditions than a real measure with restrictions that do not reflect the interests of market participants.

According to the trade weighted index for the USD's "Most Frequently Traded With Partners," the USD experienced a down-turn after recovering from the Great Recession. Although business conditions slightly improved, the markets could only progress so much to pull away; still, banks and other financial institutions attempt to comply with regulations while avoiding unnecessary losses. The USD continues to maintain its trade-weight against trading partners.

Covering inflation targets, the USD/CAD and EUR/USD exchanges follow controls implemented by authorities. Normally, the Federal Reserve encourages an inflation target of 2%. But, inflation in the Euro area must also settle. The ECB controls inflation in the Euro area through the use of government interference and other economic controls. Because of the high volume of  EUR/USD exchanges, the ECB stands out as a leading authority in the second decade of the millennium.

Perhaps the USD/CAD exchange helps to redirect capital flows in both import economies. While the USD counters the Euro, it is also easy to say that as a base the currency aids in determining in which direction capital should flow. The USD still holds value as it trades in the markets.

QUESTIONS:

 What are the other small open economies? How does the USD stack up in Gross National Product? 

keywords: fundamental analysis; fixed exchange rate; trade weight

SOURCES:

-Kari Grenade and Winston Moore. "CO-MOVEMENTS BETWEEN FOREIGN AND DOMESTIC INTEREST RATES IN A FIXED EXCHANGE RATE REGIME: THE CASE OF THE ECCU AND THE US". Applied Econometrics and International Development, 2008, vol. 8, issue 1

-ceicdata.com/en/united-states/us-dollar-trade-weighted-index

-researchgate.net/figure/Actual-vs-predicted-EUR-USD-time-series-for-the-PM12-model_fig2_344035215