Forex Blog Articles

What You Should Know About the US Dollar (USD)

August 23, 2020 | 9:50 am | Forex Blog Articles
August 23, 2020 | 9:50 am
Forex Blog Articles
What You Should Know About the US Dollar (USD)

A Close Look at the US Dollar

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.

 

USD Trends: A Look at Recent History

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.

 

How the COVID-19 Pandemic Affected the United States Dollar

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.

 

USD Rates: Impact on Businesses and the Economy as a Whole

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:

  • Ecommerce websites. While physical stores closed up or reopened with limited space and or hours, eCommerce markets thrived. More consumers than ever are now doing all of their shopping online. 
  • Big Pharma. This shouldn’t come as a surprise during a pandemic. The companies working towards vaccines and cures have seen a boost in business.
  • Logistics. This one goes hand in hand with ecommerce. More online shopping means more deliveries even if they take new forms like no contact or limited contact.
  • Video Conferencing. As people quarantine and socially distance themselves, another big winner is video conferencing services like Zoom and Skype. Zoom for example have seen shares and share prices up 50% in 2020.
  • Streaming based entertainment. While physical theaters are expected to lose close to $5 billion USD, streaming platforms like Netflix, Disney +, Hulu, and Amazon Prime Video are all reporting record numbers of viewers and volume.

 

What Does the Future Hold for the USD?

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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