The rise or fall of the dollar’s price in Iran has a significant impact on our daily lives. Essentially, our economy has progressed to a point where it is tied to the dollar’s price and experiences positive or negative changes with its fluctuations. These fluctuations have led to the creation of a separate market for currencies like the dollar and euro, where many profiteers attempt to gain substantial profits by exerting influence and creating volatility.
Of course, a large part of the rise in the dollar’s price is natural and dependent on circumstances. The main reason we at Hafez Exchange House want to discuss the reasons for the increase in the dollar’s price is its impact on foreign currency drafts. When you send money abroad through an exchange house in the form of a draft, this process can take several days. The rule for foreign currency drafts is that the exchange house must calculate the exchange rate based on the settlement day.
In other words, if the dollar’s price increases between sending the money and receiving it at the destination, the total amount of the draft will be reduced. For instance, if you send the equivalent of 1000 dollars from Iran and the currency appreciates within a day or two during the transfer, the recipient at the destination may receive only 950 dollars (according to the price increase).
The rise in the dollar’s price is a complex economic phenomenon that depends on a combination of various economic, financial, political, and social factors. In the following article, we will provide a comprehensive and detailed examination of the various factors that can lead to an increase in the dollar’s price. Stay with Hafez Exchange House.
Factors Contributing to the Rise in Dollar Prices
Just as English is accepted as the international lingua franca, the dollar is used as a common global currency. Therefore, not only do U.S. domestic policies influence its value, but global developments also impact its price. These effects can either be domestic or international, causing fluctuations in the dollar’s price.
Many factors can contribute to the rise in dollar prices, and here we mention 14 of them:
Inflation Rate
One of the most significant factors affecting the value of a country’s national currency is its inflation rate. When a country experiences high inflation, the purchasing power of its official currency decreases, leading to a drop in the national currency’s value against more stable foreign currencies like the dollar.
As a result of this occurrence and the rise in the dollar’s price, people and investors tend to convert their assets into more stable currencies like the dollar to prevent the devaluation of their assets. This directly increases the demand for dollars in the market and can lead to a rise in its price.
Contrary to popular belief, the rise in the dollar’s price is not the cause of increased inflation; rather, the higher inflation rate leads to a rise in the dollar’s price. In other words, the price of the dollar is a result of inflation, not its cause.
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Interest Rate
The interest rate plays a crucial role in determining the value of the dollar. When the U.S. Federal Reserve raises its interest rate, the attractiveness of dollar-denominated bonds and other investment opportunities increases. As a result, international investors turn to buying dollars and investing in this currency to gain higher returns. This, in turn, increases the demand for dollars, leading to a rise in its price.
Conversely, the opposite is also true. When the U.S. Federal Reserve lowers its interest rate, international investors typically withdraw their investments from the dollar, causing its price to decrease globally.
The U.S. interest rate is one of the global factors affecting the dollar’s price growth. Although it is not related to the domestic policies of other countries, it does influence them.
Government Monetary Policies
Government and central bank monetary policies in the U.S. and other countries significantly impact the dollar’s price growth. Contractionary monetary policies, such as raising interest rates and reducing the money supply, can increase the dollar’s value and raise its price. Conversely, expansionary monetary policies, including lowering interest rates and increasing the money supply, can decrease the dollar’s value and lower its price.
It is not only U.S. monetary policies that influence the dollar’s price fluctuations; the government of any country can affect the dollar’s price within its own borders through such decisions. However, this internal impact relates to the relative value of that country’s national currency compared to the dollar, not the actual international value of the dollar itself.
Supply and Demand Ratio
Although the dollar is a currency and essentially a remittance or draft, it can also be traded and invested in like a commodity. Consequently, changes in the supply and demand ratio naturally impact its price.
In reality, the supply and demand of dollars in global markets are key determinants of its price. If the demand for dollars in global markets increases (e.g., due to a rise in international trade or the need for dollars to purchase imported goods) but the supply is insufficient, the price of the dollar will rise.
Similarly, if the supply of dollars decreases (e.g., due to a reduction in foreign exchange reserves or a decrease in export volume) while demand remains high, the price of the dollar will again increase.
One scenario where the price of the dollar may decrease is when its supply exceeds demand. Therefore, one of the macroeconomic policies of some inflation-affected countries is to trade with other international currencies to reduce demand and consequently lower the dollar’s price.
Global Economy
The state of the global economy directly affects the value of the dollar. Since the dollar is fundamentally the official currency of the United States, its value is more closely tied to the economic situation in the U.S. than in any other country.
When the U.S. economy is stronger than that of other countries, international investors are more inclined to invest in dollars. This increased demand for dollars can lead to a rise in its price.
Additionally, economic crises in other countries can also lead to increased demand for the dollar as a safe-haven currency, directly influencing its price upward.
Political and Geopolitical Developments
Political and geopolitical developments play a significant role in the rise of the dollar’s value.
For example, political unrest, wars, and other international crises can lead to an increased global demand for the dollar. During times of crisis, investors typically seek to preserve the value of their assets, and the dollar, being one of the most stable currencies globally, becomes a preferred investment destination.
Consequently, the onset of international crises, internal wars, or security instability generally leads to a rise in the dollar’s value. In other words, the dollar’s price is directly linked to the level of collective fear and economic stability worldwide.
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Oil Prices and Other Essential Commodities
Many essential commodities, including barrels of oil, are priced in dollars, and changes in their prices can impact the supply and demand ratio for the dollar. When, for any reason (such as the security of transportation routes, production-disrupting incidents, political disputes, etc.), oil prices increase, buyers need more dollars to purchase oil.
As a result, demand for the dollar in the market rises, and its price increases. Conversely, when oil prices fall, the dollar’s price tends to decline as well.
It should be noted that rising oil prices are very beneficial for oil-producing countries like Iran, as they increase export profits and generate national income, ultimately reducing inflation and lowering the dollar’s price relative to their domestic currency. In such situations (for instance, in Iran), the rate of increase in the rial’s value is steeper than the rate of increase in the dollar’s price, thus benefiting the people.
Trade Balance
The trade balance of a country is one of the most significant factors affecting the value of its national currency. If a country has a trade deficit, it means that its imports exceed its exports, necessitating more dollars to pay for its imports.
This increased need for dollars means higher demand, which in turn leads to a rise in the dollar’s value. Conversely, if the trade balance is positive and export rates exceed import rates, the government’s need for dollars decreases, leading to a lower dollar value.
As observed, the greater the volume of national gross and net production, and consequently exports, the more stable and lower the dollar’s price becomes. This is one reason why sanctions and export restrictions lead to a higher dollar value.
Budget Control
Government budget control significantly impacts the value of a country’s national currency. High budget deficits and substantial government debt often lead to decreased public confidence in the national currency, increasing demand for more stable foreign currencies like the dollar. This increased demand naturally results in a higher dollar value.
On the other hand, adopting cautious fiscal policies and managing government debt can enhance national currency stability, reducing demand for the dollar and subsequently its price.
Foreign Investments
The impact of foreign investments on the dollar’s value is similar to that of exports. If a country creates favorable conditions for foreign investors, national income rates increase, and the national currency’s value relative to the dollar rises.
However, this scenario is reversed for the United States. As long as international investors put their money into the American market, they must transact in dollars, increasing demand for this currency and boosting its global value. Conversely, if more attractive global investment opportunities arise and investors withdraw from the American market, the dollar’s value will decrease.
Economic Shocks
Unexpected economic shocks, such as financial crises, economic recessions, or market bubble bursts, can significantly impact the value and price of the dollar. During such crises, demand for the dollar as a safe-haven currency increases, which in turn drives up its price.
For example, the Great Recession in the United States in 2008 suddenly triggered a significant global economic downturn and sharply increased the dollar’s value.
Government Trade Policies
The trade policies adopted by governments significantly influence the value of their national currencies. General tariffs, sanctions, trade restrictions, tax rates, and other measures can greatly affect international trade flows and consequently the supply and demand for dollars. Protectionist policies (avoiding free trade) and imposing high tariffs (including taxes, duties, customs, etc.) can reduce the volume of international trade and increase demand for dollars.
Essentially, the more vibrant international trade is in a country, the lower the inflation and the more stable (or even decreasing) the dollar’s price becomes. Conversely, conditions such as sanctions can limit international relations, ultimately leading to an increase in the dollar’s price.
Market Psychology
Though it may seem unusual, market psychology and investor expectations play a significant role in determining the dollar’s price. If investors anticipate higher interest rates, economic improvement, or positive political developments, international interactions are expected to rise, and this positive sentiment can lead to a decrease in the dollar’s price.
As previously mentioned, public fear during unstable domestic conditions is a major factor for increasing the dollar’s price, as people turn to safe-haven currencies to protect their assets. This increased demand drives up the dollar’s price. However, optimism works in the opposite way, as positive expectations prevent panic, reducing dollar demand, increasing supply, and lowering its price.
Difference Between Official and Black Market Exchange Rates
In countries like Iran, where there is a disparity between the official exchange rate and the black market rate, government currency policies and the accessibility of foreign currency to the public and investors can greatly impact the dollar’s price.
When the dollar has dual rates in a country, any fluctuation in the official rate, for reasons unrelated to the free market, still affects the dollar’s price growth. Dual-rate systems are a temporary measure to control the dollar’s price and maintain the government’s economic power, but in the long run, they lead to an increase in the dollar’s price on the black market and higher domestic inflation.
Governments (including the Iranian government) constantly strive to unify the exchange rates and control the dollar’s price uniformly.
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Conclusion
The rise in the price of the dollar is a phenomenon influenced by various political, economic, financial, and social factors. Understanding these causes can help you make more informed decisions when exchanging currencies such as the dollar, investing in it, or choosing the right time to send a foreign remittance, thereby avoiding potential losses.
Hafez Exchange is one of the best and most reputable Iranian/Canadian exchange services, offering not only currency exchange and remittance services but also valuable advice on the optimal times for issuing remittances or investing in international currencies.
In this article, we aimed to outline the most significant factors affecting the rise in the dollar’s price. We hope this information has been useful to you.
