Federal Reserve Policy
The Fed's interest rate decisions are the most direct driver of the dollar. Higher US rates attract global capital into USD-denominated assets, pushing the dollar up.
Fed meeting dates and statements are major market events. Rate hike expectations typically strengthen the dollar; rate cut expectations weaken it.
Inflation and Real Interest Rates
Real interest rate = nominal rate − inflation. A currency with high nominal rates but even higher inflation has a negative real rate, which erodes the currency's value despite high nominal yields.
Investors compare real rates across countries to assess where to park capital.
Current Account and Capital Flows
Countries with chronic current account deficits (importing more than they export) need constant capital inflows to fund the gap. When inflows slow, the currency weakens.
Portfolio investment, foreign direct investment and tourism revenues are key funding sources for deficit countries.
Global Risk Sentiment
During risk-off periods (crises, uncertainty), investors move into safe havens: USD, gold and Swiss franc. Emerging market currencies typically fall.
Geopolitical events, global recessions and financial crises are classic triggers for dollar strength against EM currencies.