There are a number of reasons that are causing the USD to rise in value among the rest of the world’s currencies today. One of the critical factors leading to its ascent is the increase in demand for the dollar. In simple terms, if the need for the dollar increases, so does its value. Demand for the dollar is high in the world today as it is the reserve currency, and foreign citizens, financial institutions across the globe, and central banks in different nations want more of it. Besides these factors, there are other causes for the demand for the dollar to rise in the world today – they are deficits in trade, the rates of inflation, and political instability.
Kavan Choksi speaks about the shift in the value of the US dollar
Business and finance expert Kavan Choksi states that in order to understand the shift in the value of the USD, one should go back a bit into the past. The state of the economy during the recession that started in 2007 forced the Government of the USA to don an unprecedented role in the global market. Since the growth in the economy was receding due to the massive financial asset deleveraging, the Government of the USA had to take measures to boost spending to support or maintain the economy.
The objective of the Government of the USA was to create more jobs so that consumers could earn money for spending. This step was taken to boost consumption, thereby fueling the drive to support growth in the economy.
How did the USA tackle this situation at that time?
During this period, the US government took the position at the expense of a rising deficit with the national debt. The Government, in short, printed money and sold bonds of the governments to investors and foreign governments to boost the USD supply, which resulted in the depreciation of the currency.
The role of the dollar in the economy today
The performance of an economy lies in its decision to sell or buy dollars. Any economy that is strong attracts investments from across the world because it is perceived as a safe haven and can render an acceptance rate of returns on investments.
Since investors always look out for the highest yield that is predictable from a safe investment that increases over time, this results in a capital account that is strong, resulting in high demand for dollars.
At the same time, consumption in America that results in the import of goods and services from other nations causes USD to flow out of the country. If substances are more than the exports, a deficit takes place in the current account.
A trade deficit can effectively be countered by a strong economy
When the economy is strong, a nation can attract foreign investments to offset any trade deficit. In this way, the USA has been able to continue with its role as the consumption driver that fuels the economies of the globe, even though it is a debtor country that borrows money for consumption. According to business and finance expert Kavan Choksi, the above move also permits other nations to export to the USA and keep growing their own economies.