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#1 18-05-2020 09:02:41

Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 2855

USD: the dollar is gaining ground against the other G10 currencies

USD: the dollar is gaining ground against the other G10 currencies

The U.S. dollar, the world's reserve currency, has been in high demand for some time. Not only has it crushed its emerging market counterparts, but it has also soared against the other G10 currencies. As the virus situation continues, many are wondering if this trend will soon change?

Prior to the current virus situation, the Fed began adjusting the federal funds rate. After a tightening campaign that lasted under three years. The few cuts made were considered a "mid-cycle adjustment" - something to temper the booming job market and strong growth.

Throughout this time, the world's other major central banks kept their rates close to zero - or lower. The ECB, for example, has kept its key interest rate below zero for several years. Even the RBA in Australia keeps its liquidity interest rate below the Fed funds rate. All in all, the global reserve currency had the highest interest rate in the developed world before the virus situation.

Entry into the virus situation

As the virus situation worsened, the Fed responded quickly. It cut the rate to zero at an emergency meeting and took a series of other unconventional measures to further ease monetary policy.

In a massive move, it opened USD swap lines to provide liquidity in other parts of the world. During the sub-prime financial crisis of 2009, the euro area benefited most from a similar measure. Today, Asia, in particular, seems to be drawing much of its USD liquidity from swap lines. Yet, despite the Fed's massive reaction, the USD has continued to strengthen.

One explanation is that in times of crisis, investors turn to the USD for safety. After all, if the USD doesn't hold, all other fiat currencies will likely follow.

Another, more plausible explanation comes from the argument that it takes time for new measures to be implemented. Moreover, it takes even longer for their effects to be felt in the economy. It is therefore not surprising that the USD is still strong.

Only when the effect of unconventional measures comes into play will the USD begin to weaken.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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