The US dollar, considered the world’s reserve currency, is a reflection of the strength of the US economy. The US economy is the largest economy in the world and quarterly growth results tend to impact the value of the currency in the short term. Another key factor that affects the value of the dollar is the interest rates that the US Fed sets. If the Fed raises the interest rates, people would want to invest more money in government treasury bonds and the demand for the dollar goes up. People would sell other currencies to buy dollars leading to an increase in its demand. As the demand goes up, its price goes up, which gets reflected in a strengthening of the dollar. The opposite happens, when rates are reduced.
However, markets never wait till the Fed actually makes the announcement or till quarterly growth results are released. Markets factor in expected information and the dollar moves in anticipation. On Jan 27, markets factored in an anticipated strong-growth announcement and the US dollar moved upwards.
Another factor that is upping the value of the dollar is the anticipation that the Fed will raise interest rates in the coming week to 4.5 percent. However, the Fed has been raising the rates continuously for over a year and the expected medium term trend is that the Fed will not be raising rates after the next hike. This broad expectation has led to an overall dampening in the dollar through the last few months.
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