When you start trading forex, you’ll notice that all sorts of things can affect the price of a currency. Here are five things that mean the price of the dollar is heading down.

Lower interest rates
Lower interest rates mean smaller profits for investors holding onto dollars. It makes other currencies look more attractive and as dollar-holders shift into higher-yield currencies, more dollars hit the market and the price falls. In practice, it’s often -- although not always -- possible to predict what will happen to interest rates, so values tend to fall before announcements from the Federal Reserve.

High business inventories
High business inventories suggests that companies are likely to be making fewer new orders in the future. That means slower growth, less demand for dollars to make new purchases or build new infrastructure... and lower prices on the forex markets.

High unemployment
High business inventories mean that companies have little reason to buy. High unemployment figures mean that individuals have little ability to buy. If consumers feel insecure about their job, spending falls and again, there’s lower demand for a currency.

High trade deficit figures
When foreign companies sell to the US, they receive payment in dollars. They can use those dollars to purchase American goods, they can invest them in US Treasury Bonds or they can convert them into their own currency. A high trade deficit suggests that they don’t want to buy American goods, so more dollars end up on offer in world markets... and the price falls.

Tax rises
Just as concern about jobs can affect spending, which in turn affects the value of the dollar, so taxation can have the same effect. Higher taxes mean lower spending and a fall in the dollar; lower taxes leave more money in consumers’ pockets, increasing spending and putting the dollar up... unless, of course, consumers buy more foreign goods, increase the deficit and put more dollars on the forex market.

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Updated: November 2007