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The Value of The Dollar: How Much Is Your Money Worth?

  • September 11, 2019
  • By Aidan Dwyer

We often establish power and status in our society by how many pieces of green paper a person has. Simply put, “money makes the world go ‘round.” Have you ever wondered: How do we actually determine the worth of this tangible object? Who does it? Why does this thin piece of paper equate to X amount of value? Below, we will discuss how the government and our society assesses the value of the money in your pocket, and why.

1. Foreign Exchange Rates

Just like goods and services, the value of money is determined by the demand for it. One way money can be measured is by comparing currencies to different Foreign Exchange Rates. The Foreign Exchange Rate determines how much money one countries currency equates to in another countries currency. The exchange rate between countries fluctuates on a daily basis and varies greatly based on the currency. The most popular exchange rate for measuring the value of the U.S dollar is comparing it to the Euro. The Euro is used by countries in the European Union.

Currently, the Euro is slightly stronger than the US dollar with an exchange rate of around 0.9. This means that $1 would exchange for €0.9, but on any given day $1 can only get you €0.88 or €0.85. While the dollar may not be worth as much as the Euro, there are many currencies that are weaker than the dollar. For example, the Mexican Peso. Currently, one US dollar is worth about 19 pesos, meaning that you can get more with your dollar in Mexico than in Europe.  It is important to be aware of these currencies, should you ever leave the country for business, vacation, or studying.

2. The Value of Treasury Yields

Exchange Rates are important for understanding the value of the dollar in foreign markets.  However, the value of Treasuries can help you to better understand the dollar’s domestic value. Treasury Bills, Notes, and Bonds are types of Treasuries the government issues that yield a return over time. Treasuries are considered low-risk investments because they are backed by the federal government. For example, people who purchase Treasuries are loaning money to the government. In turn, the government disburses fixed-rate interest payments to these bondholders as compensation.

Treasuries are sold at a discount of their face value.  When they mature, the bondholder receives the full initial face value of the treasury.  If you hold onto a treasury for the full life of its term, you will receive the full face value plus any interest that was paid over the life of the bond. The value of Treasuries, specifically Treasury Notes, is a good indication of the real value of the dollar. They can easily be liquidated in the secondary market for Treasuries.

3. Foreign Exchange Reserves

Another way to determine the value of the dollar is by being informed about the Foreign Exchange Reserves. Foreign Exchange Reserves hold the money that each country seeks to prevent from circulation in their central bank. Foreign Exchange Reserves work by having the country’s exporters deposit foreign currency into the central bank and then exchange them for the local currency.  The more money in the central bank, the less money that is in circulation. Thus, the value of the money in circulation is higher.

How Does This Affect You? 

The value of money affects you every day. Unknowingly, consumers confirm the value of their dollar every day when they buy different products and services.  They chose which products are inelastic, such as insulin, and those that are not worth their dollar, such as McDonald’s. Sellers in return create their prices based on consumer demand and value.  This means that when the value of the dollar decreases, sellers will pass off their additional costs to you so that they maintain the same amount of profits.

Nonetheless, knowing the value of the dollar will save you money and prevent you from being taken advantage of.  Protect your dollar’s value and yours as a consumer by becoming more knowledgeable about your money. Read some more of our articles here, to learn more about your money’s value and how REIL can help you properly use and invest it.

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