US Dollar Exchange Rate – Why Increasing?

Readers Question: what are the reason of dollar appreciation while the world economic situation is not good! i would apprecitae if you provide me a simple comprehensive answer.

Many factors would normally make the dollar depreciate (fall in value)

  • US interest rates cut to 1%
  • US current account deficit
  • US entering into recession
  • Uncertainty over state of US Financial sector
  • Growing national debt, being partly financed by increasing money supply

So Why Has Dollar Appreciated in Past Few Months?

Uncertainty over global economy. In 2007 and the first half of 2008, people were concerned over the US economy, therefore the dollar was falling. However, recently there has been concern over emerging markets. Countries like Hungary, Iceland, Argentina are all experiencing real financial crisis. Therefore, hedge funds and investment trusts have been selling their investments in emerging markets and Europe and converting into dollars. This global sell off is one of the main reasons for the strong dollar. It reflects the poor situation in other countries. Basically US economy is doing badly, but other economies are perhaps doing even worse.

Deterioration in European Economy The Euro economy, especially UK, has slowed down sharply. Therefore,  European interest rates are likely to fall significantly. US interest rates are already low (1%), but  Euro interest rates can come down from 3.75%. Lower Euro interest rates make holding Euros less attractive.

By on November 4th, 2008