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Factors Driving Current US Dollar Rally

If you have been watching CNBC lately, you’ll notice that the US Dollar has been skyrocketing against every major currency except the Yen.

It seemed strange to me that the dollar would get stronger amidst a crumbling worldwide economy, bailouts left and right, and a 11 trillion national debt, so I did some research.

Possible Factors Behind the Latest Rally
1) The US Dollar is still the worldwide reserve currency.
When there’s instability, banks and investors hoard cash and T-bills. Many exchange settlement transactions worldwide are denominated in USD. America has been abusing this privilege, but nevertheless the US dollar is still king.

2) Traders are fleeing the Euro b/c the EU’s credit crisis problems are even worse than what’s going on in America. America screwed up but so did a lot of other countries. Some people are speculating that the Euro/USD rate will go as low as 1.00 or 1.25. There is enormous pressure on the European Central Bank to lower interest rates in the next few months. Investors can trade ETFs like FXE (Euro) and FXY (Yen) to get some currency exposure in their portfolios.

3) The latest sell-off in oil and commodities has eased sentiment of inflationary pressure. The strong indications of a global, multi-year depression decreases demand on raw materials. Many people are actually talking about a short-term deflation in the US Dollar as global investors deleverage by selling off funds and staying in cash.

4) Forex traders are exiting out of carry trade positions. This is driving up the Japanese Yen as their low-interest paper gets repurchased.

Any other ideas?

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Comments (10)
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10 Existing Comments
  1. Zircon-212 said:
    on October 24th at 11:27 am

    The obvious trades do not work! It seemed so obvious that measures the U.S were taking ‘should’ be dollar negative and the crowd bought into this alongside with the doomsday bloggers insisting gold at $920 was a great buy. The market had a brief sell off in the dollar but this was into a trend that already favored a stronger dollar. In the end the ‘why’ does not really matter. Stick with the trend. As my old boss in London used to say when I worked as an F/X dealer ….’bottom pickers get smelly fingers’. As some point we get a currency bounce/dollar sell off, but one can and a lot have been taken out in a pine box trying to guess that level.

  2. Jesse said:
    on October 24th at 02:51 pm

    The USD is still the safe haven for many international investors, which is one of the main reasons the dollar has continued to strengthen against the euro. In fact, many large companies in Mexico and Brazil thought the dollar would continue to weaken, and ended up taking huge currency bets against the dollar. These companies have now lost billions, and some have gone bankrupt.

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    on October 24th at 07:33 pm

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  4. roy said:
    on October 26th at 12:56 pm

    USD still looks weak in long term.

  5. Luigi said:
    on October 27th at 05:51 pm

    Yes, there’s a certain irony – the sub-prime thing kicked it all off, went to inter-bank loans grinding to a halt, no liquidity… and then the UK find they’ve got even more of a housing mess, with the buy-to-let idiocy… and poor old Canada gets sucked in even though they have a basically sound economy at present.

    USD and JPY will stay relatively strong against the other major currencies for a while yet – a good thing overall for the US, but not so good for Japan, being very dependent on exports…

  6. BloggingBanks said:
    on October 27th at 06:59 pm

    It’s very funny how in our globalised world everything goes up and down in tandem domestic and foreign stocks, currencies,commodities, real estate as well as interest rates. It’s also interesting that a simple long-term CD investing strategy has outperformed S&P 500 since 1997.

  7. Coh said:
    on October 28th at 03:30 am

    If the world went down the toilet and WW3 became real….where would you want your cash stashed? Vietnam? Russia? Switzerland? USA? Which country has the largest military in the world? That’s what safety really means.

  8. J said:
    on October 28th at 08:31 pm

    When will cd rates go up???
    If everyone is stashing their cash there is no need to raise those rates and they cant/wont BECAUSE THERE IS NO REAL CATALYSTS to making money to pay higher rates on CD’s.

    Lets see, whats it called when unemployment is edging higher, homes are forclosed, banks arent getting paid by the customers but now they are getting bailed out by those same customers ( nice irony, eh???)

    Bonds are junk
    the market goes up 900 then down 500 every other day.

  9. Sam said:
    on November 13th at 04:38 am

    I think the answer is simple: There is nothing good going on in our economy to straighten the dollar. So why is it getting stronger? It’s because everyone else is doing far worse and waiting and hoping on us to fix the problem sooner so we can pull Europe and Asia out of the gutter. I’ve even heard Europeans blaming US for the economic problems they are having. Huh? And I thought they convinced me that they are separate sovereign countries in which the US has little if no control. Call me crazy but US is the target of all blame all the time.

  10. Tom said:
    on November 16th at 06:11 am

    The problem in the US is that not only our country is extremely in debt but also the single individual. We have been spending more than we earn. And the economy also has a huge trade deficit.

    We pumped money into the market with very low interest rates – making people consume more and companies invest more. But these loans have to be repaid – WITH interest. The problem: The government is currently not even able to repay the full interest due. Worse, it has to lend more money to pay the interest. A vicious circle…

    We should look at Europe and dont get offended when people do point fingers at us…