Why is the USD so strong again ?

Question

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 ?

Is it because the global perception of the USD still as a defacto "safe haven" currency ?

prashok · Answer

I'm interested in knowing the answers for this as well, so that I can decide whether I should pay tuition for LBS ASAP or delay it as long as possible. :lol:

For example, some say it is short-term deleveraging driving up the dollar temporarily, but is there any merit to this? https://www.europac.net/newspop.asp?id=14753

Paradosso · Answer

It seems to me that it's not that the USD is strong, but rather the GBP is weak.

fall09 · Answer

I agree with Paradosso.Also US is expected to come out of recession earlier than Europe.We will see further slip in Euro after ECB cuts rates.

bsd_lover · Answer

Still not convinced - the reasoning so far only applies to pound (which admittedly is going weaker against the AUD) and the Euro. But what about other majors that the USD has risen against - such as the AUD.

Paradosso · Answer

Really the AUD is a major currency? :D Jokes apart, I imagine the AUD being strongly linked to the GBP for obvious reasons.

In the end the British economy is the one who is foreseen to be most heavily hit by the current downturn: it shares all the weak points with the US (huge consumer/household debt, huge real estate bubble, financial hub) but unlike the US it is not a giant and an industrial behemoth that people still run to when times are bad.

Plus, Brown has made some pretty strong intervention as well (though more quickly and probably more effectively than Paulson/Bernanke).

Plus, the GBP was very strong as a starting point, stronger that its long-term trend that I think is much closer to today's value than to 2 vs. USD.

filmcity · Answer

I do not know why USD is strong against AUD, but I can throw some light on why USD is performing soooo strong against Indian Rupee ( The USD has appreciated 25% within less than a year).

The truth is , in Indian financial market there has been a HEAVY presence of US institutional investors ( not only the big I banks, but scores of small investment firms as well).

Now , when the downturn happened and especially after the Lehmann episode, almost all US institutional investors started to build there cash reserve back in their home. As a result, they started selling their Indian holdings. They converted the rupee proceeds to USDs and took the money to their country.

This resulted in an enermous demand of USD and sudden flush of INR in the Indian forex market. Hence the appreciation of USD.

I do not know about the Australian situation, but this has happened in several countries where there is high presence of US institutional investors.

bsd_lover · Answer

That is a good chain of logic - definitely applicable to to AUD as well +1.

incognito1 · Answer

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.

3underscore · Answer

Trying to explain FX is really tricky, if nigh on impossible.

I think what has been seen over the last few months is that, through a sense of wide-spread economic recession, that a long term hold that has been the Purchasing Power Parity mismatch has been redressed. There are some seriously odd things that still prevail, which I am actually writing a paper on so am not really going to throw out here.

There may be a hint that dollar demand has increased through a necessity to pay losses in dollars - I haven't overlapped the straight link of spot versus the whole LEH / AIG collapse, but I wouldn't be super surprised if it lines up nicely. Maybe some decent correlation and regressions need run on it.

I was chatting about this today as a medium term view with my brother today. It is an interesting situation, and between the two of us we agreed on some interesting things we are watching for (and plan to trade off, hence the silence!)

bsd_lover · Answer

Jim Rogers on Bloomberg had his own explanation last night. Its all to do with de-leveraging apparently. He believes that the currency is still fundamentally flawed because the US govt is just printing more dollars without the fundamentals to support it.

He also mentioned that the 30 year treasury bonds are a big bubble - "why would you wanna lock in your money at 3-4% for 30 years ??" were his precise words.

3underscore · Answer

Because you are a pension fund and it is about the only thing to match your duration?

BearStearner · Answer

Dollar tends to strengthen when investors appetite for risk diminishes.

The US dollar usually appreciates as risk aversion remains a very real theme in the markets. The biggest piece of evidence of this: increased demand for Treasuries, the 2.94 percent drop in the Dow Jones Industrial Average, and the nearly 6 point rise in the CBOE’s VIX volatility index. Meanwhile, the negative December retail news is particularly negative because the holiday shopping season is supposed to be a boon for retailers, but even the most aggressive discounting wasn’t able to offset the impact of a deteriorating labor market, tighter credit conditions, and a year-long recession. With job losses continuing to climb, the dismal retail sales results may be just a part of a rather consistent trend through the first half of 2009.

Going forward, risk trends may continue to determine price action for both the US dollar as we’ve seen that at this point, fundamentals have little impact on the currencies.

togafoot · Answer

Even more so the YEN!!!

bsd_lover · Answer

This article on seekingalpha predicts a USD crash touching upon some of the reasons of the intermediate resurgence :

The US dollar’s surprising strength since last July was largely attributed to "de-leveraging" and "risk-aversion," which are references to the unwinding of "carry trades," in the foreign exchange market. On April 6th, famed hedge-fund trader George Soros remarked, "The US-dollar is not strong because people want to hold the dollar, but it’s strong because people have debt in dollars."

Full article is available here :
https://seekingalpha.com/article/138966- ... sb_popular

Angry_Mallard · Answer

Read this guy's writings. He explains in a fairly comprehensive manner why USD is experiencing deflation rather than inflation.

Shortest answer I can give: It's because the USD is still the most stable reserve currency, due to it's liquidity and large quantity available.

edit. Won't let me post. Look up Martin Armstrong

Why is the USD so strong again ?

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