bsd_lover wrote:
Ok here I go again with my stupid questions. But at one stage earlier this year (2008) - the USD was at a record low against the Australian Dollar @98 cents. But now the rate is 68 cents. All of a sudden the USD is also extremely strong against the Pound. My question is WHY ? Even though the US is in the midst of one of the largest financial crisis and the Federal reserve is literally printing USD out to throw into any ailing sector. Surely this ought to devalue the currency - yet the current market doesnt seem to think so.
Is it because the global perception of the USD still as a defacto "safe haven" currency ?
I think it has to do with the current level of circulation of USDs. The Fed is supposedly pumping money into the economy, but major banks haven't started giving out loans yet ("recovering" from the current losses, shall we say). Net result is less US dollars being introduced in the global financial pool, making the dollar more valuable as a direct consequence of the supply/demand law (circulation of other currencies has not decelerated proportionately).
Another reason is to prevent bankruptcies. In times of major economic upheavels, such as severe recessions and depressions, failing companies, out of desperation, rapidly sell off assets such as gold, real estate etc to get hold of as much cash as possible, to stave off a potential bankruptcy. This again reduces the total dollar supply in circulation, making the USD more valuable. Moreover, since the USD is a global currency reserve (having long replaced gold and other physical assets), it goes up relative to other currencies in such times due to its universal demand. This theory also explains why gold, which is historically a safe haven during economic hardships, isn't gaining as much value as it is theoritically supposed to due to the volume and magnitude of failing companies in the current recession.
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