How Is the Value of American Paper Money Determined?


Quick Answer

The value of American paper money is determined by supply and demand factors, says Investopedia. This value is also affected by investor sentiment and psychological factors.

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Full Answer

The dollar rises when the United States experiences above-average growth and foreigners are motivated to purchase U.S. stocks with U.S. dollars, according to Investopedia. U.S. economic growth also spurs the sale of bonds issued by the U.S. government and established U.S. corporations. Since foreigners must convert their foreign currencies into U.S dollars to buy U.S. stocks and bonds, increased demand for this service raises the relative value of the U.S. dollar.

Even if U.S. stocks are healthy, the U.S. dollar can fall due to unfavorable economic indicators, such as rising unemployment numbers. These indicators can affect the sentiments of investors around the world, who may avoid U.S. stocks and bonds and use their own local currencies, according to Investopedia.

In 2007, the U.S. dollar lost value when the U.S. government printed money and sold government bonds to increase the overall money supply, reports Investopedia. Interest provides one reason why rapidly issuing debt can depreciate the dollar; when the U.S. government issues more debt than usual, this ensures that more U.S. tax dollars are needed to cover interest payments on that debt. This can worry investors and lead to a less robust U.S. dollar.

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