The decision of whether you should buy or sell dollars depends on the conditions of the economy. If the economic conditions are favorable, it will lure investment from all over the world due to obvious safety and higher rate of return obtainable on investment. Investors always look for the higher predictable yield from wherever they invest. Due to the investment from abroad, the capital account becomes stronger and consequently the demand for dollar increases. The flow of dollars outside the country occurs as a result of increased consumption of goods and services, which is due to the import of goods and services from the other countries. If imports are more than exports, it will result in trade deficit. If a country attracts foreign capital from another country, it can overcome its trade deficit.
Effect Of Supply And Demand Factors On The Value Of Dollar:
As a result to export of goods and services to the other countries, the demand for dollar increases. This is because the other country now needs dollars in order to make payments. So for this purpose, the country has to convert its local currency into dollars and hence the resultant rise in the demand for dollars takes place.
Same is the case when the U.S. government issues bonds for the sake of raising capital. There will be a rise in the demand for dollars if these bonds are bought by the foreigners. So once again, they have to make the payment in dollars to purchase these bonds.
