How do strong U.S. Economic Fundamentals affect the Forex Market?

[Sam Waterson]

[Patrick Anderson]

The U.S. Dollar, more than any other currency, is used as a reserve currency by countries around the world. It therefore has the greatest influence on the entire forex market. When the U.S. Economy exhibits strong fundamentals and growth, the U.S. dollar will gain strength creating demand for U.S. Dollars. For currency pairs in which the U.S. Dollar is the base currency (i.e. USDJPY), the rate decreases as the U.S. Dollar gets stronger. In this case, it takes more JPY to buy 1 U.S. Dollar. Consequently, in the fractional rate, a larger denominator (JPY) means a smaller fraction which translates to a lower rate.
For currency pairs in which the U.S. Dollar is the quoted currency (i.e. EURUSD), the opposite occurs. the rate increases as the U.S. Dollar gets stronger. In the case of the EURUSD, it will take less U.S. Dollars to buy 1 EUR. The denominator of the pair (USD) decreases making it a larger fraction, and therefor a higher rate. This effect happens to all currency pairs either directly, or indirectly as in the case od cross-currency pairs.