Why is the dollar so important to our economy?

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The rise or fall of the dollar is the kind of news that is always in the newspapers. But do you want to know why monitoring this variation is so important for our economy? Then today's post is for you, who wants to understand why we talk so much about the value of the US currency.

As you may know, Brazil's economy is not closed. And events around the world influence or are influenced by it. Traditionally, the dollar is the currency widely used as a reference for value. And that is the key word: reference.

When we talk about the price of the dollar, most of the time, what we ar ukraine whatsapp list talking about is the exchange rate of the real against the dollar or other currencies in the world. In simple terms, this is the calculation of how many reais are needed to buy one dollar or another currency. In other words, its price serves as a measure to arrive at an idea of ​​the relative value of the real at a given moment.

And why not another currency?
The United States, for a long time the largest economy on the planet and having a great influence on the dynamics of global trade and finance, has played a historical role that has established the dollar as an important store of value. Countries, companies and individuals trust that the US currency has a relatively stable value over time and that it is safe to keep their savings in dollars. Thus, the tradition was created in most countries around the world of using the dollar as the reference currency.

Reasons for the dollar variation
You may be wondering: if the dollar is such a good store of value, why does it fluctuate? Since 1999, Brazil has adopted a floating exchange rate regime. This means that the value of the dollar is not fixed; it varies according to the need of individuals or companies to buy or sell dollars. In other words, the value of the dollar, which as explained above is a reference to the exchange rate of the real in relation to the dollar, varies according to the law of supply and demand.

In short, it works like this: when there are a lot of dollars available on the market and few people want to buy them, their price tends to fall. When the opposite occurs, when there are few dollars available on the market and many people want to buy them, the price of the dollar tends to rise.

It is worth noting that this balance is the very complex result of a series of other internal and external factors. One of them is the trade balance, when Brazil imports and exports. Generally, companies need dollars to pay for what they import and receive in the same currency for what they export. Another factor is the interest of investors in Brazil, bringing dollars here, or of Brazilian agents investing abroad, operating in the opposite direction.

Likewise, there are also financial transactions carried out between residents and non-residents of the country, such as investments, buying and selling shares, bonds, currencies, among others. Among other factors, it is also important to highlight the degree of predictability of the economy, the level of investor confidence and the degree of profitability of companies. In short: everything that affects the demand for dollars will affect, in one way or another, its price.

Does the Central Bank intervene in the dollar market?
The Central Bank of Brazil (BCB) never intervenes in the foreign exchange market to regulate the price of the dollar. What it does is ensure the proper functioning of this market, reducing excessive volatility, avoiding liquidity restrictions and guaranteeing market protection mechanisms.

Reducing volatility means taking action to prevent very sharp fluctuations in a short period of time. And to ensure that the market reaches a point of equilibrium more smoothly. Liquidity restrictions can occur in situations of dollar shortage, such as when economic agents have difficulty meeting the needs of everyone who needs to trade foreign exchange. In other words, there is a shortage of dollars in the market. So, the BCB sells the currency to meet this need.

Finally, market protection mechanisms are the prudential rules created by the Central Bank to ensure that a financial institution does not take on excessively high risks. Risks that, in the extreme, could unbalance the market as a whole. This is why the BCB operates in the foreign exchange market, not to artificially affect the price of the dollar.

Now that you understand a little about the importance of the dollar for the Brazilian economy, share this post with other people who may also be interested in this content. Remember that the information contained here was taken from episodes 48, 49 and 50 of the “ BC explains to you ” series by the Central Bank. If you prefer to watch the content in video format, watch it below: