Why is the USDollar so strong against most other currencies despite the economic problems in the US?
74Christmas will be a sad affair for many this year. As 2008 comes to a close, the economic state of affairs in the United States is frightening. The economy has slowed considerably, many people have lost their jobs. Companies are cutting back in the face of declining consumer demand. Consumers are spending less because they are losing their jobs or fear losing them. It's a vicious circle.
There has been a government bailout of banks, and now there is talk of rescuing the auto companies. Some are wondering who will be next. While all this has been going on at home, on the world stage the US dollar has been riding high. It has been gaining strength against most other currencies. Why would that be? Why would the dollar be strong if things are so bad?
Well, first of all, things may not be quite as bad as they seem. At least the government is doing something and not sitting idle while the ship sinks. Overseas, the economies of other countries are suffing the same plight as the United States - economic decline. The US is the largest economy in the world. It is the world's economic engine. When the engine slows down, the whole vehicle slows down.
The US is also extremely stable, politically. All countries have currency reserves - they hold their reserves mostly in US dollars, because of that stability. When their own economies start having difficulty, these other countries want to hold more of their reserves in the most secure, sizeable, and most stable currency - the US dollar.
Like everything in economics, the law of supply and demand rules. That law states that when the supply exceeds the demand, the price goes down; when the demand exceeds the supply, the price goes up.The more money there is chasing a limited supply of a commodity, the price of that commodity will go up. Countries wanting to hold US dollars must buy those dollars on the world currency markets, As more countries want to buy dollars, the price goes up. So the US dollars gains in strength.
In time it will come down again as other considerations come into play. For the time being, though, the US dollar is strong.despite the economic weakness.
Frederick Pearce
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Dear,
You have rightly stated the fact answering my question. I had similar answer in my mind that you have confirmed. I am writing on American economy continually since last six months.
Thanks,
Jyoti Kothari
Hi Frederick,
I guess what you have written makes sense. The other problem I've been pondering lately is the proposed auto manufaturers bailout. We are having similar problems in the UK, and a similar bailout has been mentioned. My problem is that propping up an industry which is making something that no one is buying seems foolhardy, yet so many jobs depend on this, and to let those jobs go will be tearing the fabric even further. Any thoughts?
Thanks for your comments, everyone..
Amanda - There is a fall in car sales for now, but that will reverse before long. People have cut back because they cannot get credit or are afraid of losing their jobs. Letting the car compaines fail will only make matters worse - fewer jobs, less credit, more fear. If the banks cannot or will not lend to the auto manufacturers to get them over this hump, then the government must. Not for the companies themselves, but for the country as a whole.
It's because if the US economy is bad, it greatly affects and reduces the wealth ofother nations who rely on the US to buy from them.
Simply put, if US is having a bad time, many countries are going to have it worst.
The demand-supply equation works on another level also. US firms have invested a lot in other economies, particularly high growth economies like India and China. In India, typically the inevestments have been as FIIs (Foreign Institutional Investments), and not as FDI. Inherently, FII is more volatile than FDI. In fact, it has many of the characteristics of the so called "hot money". On first whiff of economic troubles back home (USA), these firms have pulled out by purchasing dollars. This means very high demand for dollars. This has resulted in dollar appreciating against Indian rupee by more than 25%.
Do you think the USD will remain at the top? Do you think it will remain the World's Reserve Currency?
I don't think the US Dollar will remain #1 forever, but will for a long time to come. Even now countries hold their reserves in multiple currencies, and the mix of currencies fluctuates over time.
There is lots of speculation among financial analysts these days that the dollar will lose its standing particularly as the current recession (oh, it's over, isn't it...yeah right.) wreaks havoc worldwide and India/China continue developing at break-neck speed. Guess we'll see.
Thanks for commenting, Harris. Recession is a technical term and under the definition of that term, it is over. You, and many other people, may be feeling hardship, but that does not mean the recession is not over. Some people feel hardship even during boom times. Furthermore, a recession and recovery is likely to strengthen the dollar's position as a world reserve currency, not weaken it. The speed or otherwise of the development of other countries will not affect that for many years to come.
Shalini Kagal Level 4 Commenter 3 years ago
Quite honestly, it had me wondering too - and I couldn't quite figure it out! Seemed rather a paradox - but you're right - finally the dollar seems to be the strongest thing going right now!