The United States Dollar is a powerhouse. Representing the world’s largest economy since 1871, the USD is the most widely circulated and traded currency in the world. This global dominance and the fact that it’s the world’s reserve currency makes the USD one of the most stable currencies to trade. The USD appears on half of all forex trades just under 90% of the time.
This global presence, coupled with the relatively stable nature of the United States itself, make the dollar a preferred currency pair for most traders to trade with.
As the world’s largest exporter and importer, the US economy continues to grow. In recent years, the country has been able to weather several difficult economic periods, including the financial crisis in 2008/2009. This is largely due to the Federal Reserve cutting interest rates down to 0% to stave off another great depression.
Another factor that influences the strength of the economy is the politics of globalization. As politicians look to rewrite trade agreements in an effort to protect US workers and goods, the economic impact could be profound. Anti-globalization policies have the possibility of increasing labor costs, encouraging inflation and alter tariffs and duties, all of which can negatively impact the health of the dollar.
The health of the United States’ trade partners greatly influences the health of the US dollar. For example, countries like China and Canada have a very strong sway over the USD. When the dollar collapsed during the subprime mortgage crisis, the commodity booms that followed gave a huge boost to the Australian and Canadian dollars.
Unlike other countries that experienced hard currency crashes, the United States is one of the few currencies that thrived during the crisis. When the virus first hit, many investors clearly foresaw the damage it would cause and sold off riskier assets like stocks and bonds for cash. As the world’s reserve currency, most of these transactions brought back US dollars. At one point the demand for US dollars was so high the US Federal Reserve set up swap lines to lend cash to other countries’ central banks.
This push for US Dollars represented a familiar trend during uncertain times. In turbulent times investors usually turn to the dollar in order to weather a financial storm. Even though the US government engaged in massive deficit funded spending which should have weakened the dollar’s value, the currency strengthened several points during the first half of the year. Since then the USD has returned to 2019 rates and even weakened a little.
As we just mentioned, the US dollar was one of the “winners” throughout the early stages of the Covid-19 pandemic. While certain industries took a massive hit (movie theaters, airlines, sports, etc.), there were a few that benefited greatly.
Here are a few of the industries looking stronger than ever:
Many have predicted a fall of the USD as China continues to make ground economically. There may be a discrepancy between how the country is actually doing versus how the markets are doing. It is hard to predict what will happen to USD rates, as we write this article the USD is slightly weakening against most currencies.
But, as long as the world remains in the grips of a crisis and uncertainty, the dollar may stay strong and valuable as its demand likely won’t diminish.
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