Currency and commodity traders and investors are always seeking information that will provide insight into whether the value of the dollar is set to rise or fall. Just as there are a variety of indicators that stock traders use to track the health of companies, there are a variety of economic reports that provide insight into the future direction of the value of the dollar.

(For further reading, see The Fundamentals of Forex Fundamentals.")

Tapping Fundamental Analysis

Fundamental analysis involves the use of data to discern information about an investment. The value of the insight provided by a particular data point can vary in importance because economies are dynamic and subject to change. For example, when the U.S. economy is expanding, inflation fears may result in an increased focus on data points that indicate the presence of inflation. When the economy is contracting, reports that show a decrease in consumer activity may weigh more heavily on the direction of the dollar. For this reason, a broad range of economic reports is useful when conducting research on the dollar.

Some notable macroeconomic indicators are highlighted below. Keep in mind that the actual statistics are often less important than their direction (rising or falling) and their success or failure in meeting pre-release expectations. Upside surprises can bring good news, while downside surprises can cause the currency to tumble.

(To learn more about what drives the U.S. dollar, check out "3 Factors That Drive the U.S. Dollar.")

#1. Trade Balance

The trade balance report, which is jointly produced by the Bureau of Economic Analysis (BEA) and the U.S. Census Bureau, provides insight into import and export activity. The nominal trade deficit, which represents the current dollar value of U.S. exports minus the current dollar value of U.S. imports, is a key indicator within the Trade Balance Report. When imports exceed exports, the nation is said to have a trade deficit. When the reverse is true, the nation is said to have a trade surplus.

A trade deficit portends bad news for the dollar, as it means foreign goods are in demand. Those goods are ultimately purchased with foreign currency, which creates a higher demand for foreign currency. A trade surplus, on the other hand, means that foreign consumers are buying more American goods. This results in demand for the dollar. The trade balance report is released approximately six weeks after the end of the month it references (on or about the 15th of the month) at 8:30 A.M. Eastern Standard Time and covers the two prior months.

(For further reading, see "What Is the Balance of Payments?")

#2. Nonfarm Payroll

The Nonfarm Payroll Employment Report, produced by the U.S. Department of Labor Bureau of Labor Statistics (BLS) tracks the number of jobs added or lost each month. If the economy is adding jobs at a healthy pace, interest rates may move higher. Higher interest rates are attractive to foreign investors, increasing interest in and demand for the U.S. dollar.

The opposite is also true, with job losses having the potential to push interest rates lower and weaken demand for the dollar. The Nonfarm Payroll Report is released on the Friday after the conclusion of the reference month at 8:30 A.M. EST.

(To learn more about the Nonfarm Report, see "Trading The Non-Farm Payroll Report.")

#2. Gross Domestic Product

Gross domestic product (GDP) tracks the monetary value of all the finished goods and services produced within a country's borders in a specific time period and used as a measure of the nation's health. Similar to the nonfarm payroll number, if GDP is rising, interest rates tend to have a positive correlation. Higher interest rates attract foreign investors and as a result, the dollar tends to rise. Similarly, if the GDP is falling, the dollar tends to fall. The Bureau of Economic Analysis releases GDP data at 8:30 A.M. EST on the last day of each quarter.

(For further reading, see "The Importance of Inflation And GDP.")

#4. Retail Sales

Retail sales are an aggregated measure of the sales of retail goods over a stated time period. Strong sales suggest a strong economy, while weak sales suggest a weak economy. Here again, we can conclude that strength in sales equates to strength in the dollar.

The Retail Sales Report is compiled and released by the Census Bureau and the Department of Commerce on a monthly basis. The report covers the previous month and is released about on or about the 13th of the month at 8:30 A.M. EST.

#5. Industrial Production

Industrial production figures are based on the monthly raw volume of goods produced by industrial firms such as factories, mines and electric utilities in the U.S. Newspapers, periodicals and book publishers, traditionally labeled as manufacturers, are also included in the industrial production figures. Industrial production data usually reflects similar changes in overall economic activity, so strong figures are a bullish sign for the dollar and weak data is a bearish sign.

The Federal Reserve Board releases industrial production figures on or around the 16th of each month at 9:15 A.M. EST and the report covers the previous month.

To learn more about the retail sales report, industrial production data and other indicators, see "Using Coincident and Lagging Indicators."

Beyond Trading Indicators

There are a whole host of additional indicators outside of the five we've outlined above, including reports on inflation, home sales and foreign purchases of U.S. Treasury securities. These reports also affect the direction of the dollar, and there are other factors at work as well.

Government plays a significant role in the strength of the dollar, as foreign investors are watching for signs of stability and prosperity. Steady, consistent policies, a stable geopolitical outlook and tax cuts for consumers are all positive developments for the dollar. On the other hand, terrorist attacks, wars, increased government spending, and unpopular presidents are all bad news for the country and the dollar.

Overseas developments also come in the play, as factors such as a strengthening euro or a decrease in foreign reserves (dollars held by foreign countries) are bad for the dollar, while instability in foreign nations is good for the dollar.

The Bottom Line

It's safe to say that investors have plenty of data to consider when investing in U.S. currency, with such a large number of diverse factors playing a role in the value of the dollar. While there are numerous indicators that can ultimately contribute to the rise and fall of the dollar, reports on the trade balance, nonfarm payroll, GDP, retail sales and industrial production are most commonly tied to currency movements.

For further reading on the dollar, see "The U.S. Dollar's Unofficial Status as World Currency."