The difference in performance of the dollar: from August to October
Oct 29, 2021
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Known as the world’s base currency, the US dollar (USD) plays an important role in the global economy and is a major currency in the forex market. But as the world recovers from the impact of the pandemic and discussions surround the borrowing limit of the US government, what movement has there been in the value of the USD from month to month?
Read on to find out more.
Effects on the US dollar
Firstly, let’s start with some basics. If you’re a trading beginner, you may be wondering what is forex trading and how does it work? And if you’re interested in trading USD, what can impact its value.
Firstly, you should understand that currency is traded in pairs, as forex trading is essentially the purchase of one currency against the other. In order to read a currency pair, you must know which is the base (the first currency) and which is the quote (the second currency). For example, with the euro and US dollar pair (EUR/USD), you would be buying euros and selling dollars, with the exchange rate reflected in the quote currency. If the EUR/USD is trading at a rate of 1.1322, it means that €1,000 can be exchanged for $1,132.20.
When it comes to what can affect the exchange rate, there are a number of different factors to consider as a trader. You can then conduct fundamental and technical analysis to inform your trading decisions and position you take on the forex market.
Seemingly most importantly in recent events, central banks of the relevant nation can affect the forex market. In the case of the USD, the Federal Reserve is the central bank of the US. These establishments generally determine the level of money supplied, as well as the interest rates of the country — both of which are integral to the strength or weakness of the nation’s currency.
As such, interest rates are also a worthy factor to monitor, as unexpected cuts or increases in rates can cause volatility in the forex market. Other economic data, such as unemployment rates and inflation can also be important indicators of the currency’s strength.
The value of USD in October vs August
At the time of writing, the USD has been deemed a safe haven amongst continuing coronavirus concerns in the rest of the world and uncertainty of the growth and recovery of China’s economy.
The actions of the Federal Reserve have also had an important effect on the USD. The amount that the US government can borrow has been lifted, with Congress extending the debt limit through to early December 2021. The borrowing involved is done via the US Treasury through the issuing of bonds — which are seen as one of the most reliable investments in the world.
With a rise in the debt ceiling, there has been a surge of confidence in the US dollar, and reassurance of the strength of the US economy, as well as the health of the global economy as a whole. The debt ceiling is to be raised to the set amount of $480 billion to ensure bills are paid through to December 3rd.
The forex market responded to this ongoing news. The dollar was driven high in late September 2021 and continuing into the month of October. In fact, in recent weeks, the dollar index had its largest percentage gain since last August. It also hit the highest point in the year in comparison to rival currencies.
It’s predicted by economic analysts, that the projection for the dollar will see it rise to near $95.35 by the end of October, with the dollar index already reaching $94 by the end of September 2021.
Response in other markets
If the USD continues on an upward trend, this could put pressure on industries that deal overseas, as the exchange rate will affect the revenue that they get from outside of the US. As a result, there could be implications on the stock value of these companies.
The movement of the dollar will also have an intrinsic effect on the value of gold, putting further pressure on the commodity, and perhaps changing market sentiment towards what is deemed as a safe haven. At the end of September 2021, gold fell to around $1,725.