This article will discuss the 10 reasons why the United States dollar keeps getting stronger and the major factors that are behind this strength of the dollar.
We will also answer one important question which says ‘What currencies are stronger than dollar?
There is no doubting the fact that the United States dollar is the most versatile currency in the whole world. It is the currency that is mostly accepted globally and it is the major player in the global foreign exchange market.
The strength of the U.S. dollar has a great impact on the American economy as well as the global economy.
Now, let us look at 10 reasons why U.S. dollar getting stronger today.
- Following the Great Recession, the Federal Reserve Board stopped the expansive monetary policy as the American economy continued to improve. This decision reduced the supply of the dollar, thereby increasing its value. Whenever there is a reduction in the supply of the dollar, it’s value always increases because the supply is not catching up with the demand.
- The Federal Reserve Board also increased interest rates in December 2015, this automatically escalated the rate of the dollar. When interest rates are increased, bond yields are instantly lowered and investors interest in U.S. Treasury notes are reduced in the short-term. When this happens, the demand for dollars increases as well as its rate and value when compared or converted with other currencies.
- The value of Euro was lowered as the European Central Bank reduced its interest rates. This increased the strength of the dollar due to the fact that the euro makes up 57.6 percent of the value of the American dollar value index. The euro is one major currency that constantly contends with the dollar at the top of the global foreign exchange market.
This means that the euro has a huge influence on the strength and performance of the dollar. Once the euro gets weaker, the dollar gets stronger, the same happens when the dollar gets weaker, the euro gets stronger.
- Political instability in the European Union weakened the strength of the euro and this has made the dollar to keep getting stronger today. Like we said above, whenever the euro gets weaker, the dollar gets stronger.
- The strength of the dollar was intensified by forex traders as they used debt to trade (using leverage), this weakened the euro and instantly strengthened the U.S. dollar. When the dollar is being used more, the value keeps increasing because of the increased demand.
- The struggle by Europe in distributing the COVID-19 vaccines, the increased infections, as well as new infections of the virus in many European countries has a negative effect on economic growth expectation for Europe, this translates to weakness for the euro and strength for the dollar.
- Extended lockdown of businesses in several countries in Europe because of the COVID-19 pandemic has also weighed on the European economic growth expectations and this has negatively affected the euro while positively affecting the dollar.
- The economy of China is slowing down and the Delta variant of COVID-19 which is highly transmissible is likely going to force several countries to slow down or reverse their reopening plans. Investors are worried over this and are becoming cautious. This has made several investors to unwind their bets against the dollar, thereby strengthening it against other major trading partners.
- Investors are afraid that it could take a longer time to a longer time for the United States government to sign the infrastructure bill into law. They are also afraid that it may be smaller than expected, they are also growing concerned that the U.S. recovery is reaching a junction, this is why they are removing their bets on the dollar thereby making it to be stronger.
The infrastructure bill was widely viewed as the next big wave of the United States government stimulus, but it may not be signed into law very soon and this has made investors to pull back amid fears, this has further strengthened the dollar.
- There has been fears that the global recovery pace may have already peaked, this has made the dollar to become a refuge against disappointment and uncertainty. With the COVID-19 pandemic and economic challenges hitting people globally, the dollar has been serving as a rescue point for investors and countries, this is why the dollar is strong today.
- The global economy is currently struggling and this gives the dollar more strength. Whenever the U.S. economy performs better than the global economy, the value of the dollar increases, if the global economy gets better than the United States economy, it weakens the dollar. Also, dollarization of the conomy becomes a major issue in many countries. For instance, in Nigeria, exchange rate dollar to naira black market is over 14% higher than the official bank rate. Many countries are struggling to come out of the coronavirus pandemic and other economic issues, this has affected global economy and with the dollar being the major currency in the world, the dollar has continued to increase.
What currencies are stronger than dollar?
The image below shows the list of the top 10 countries that have the highest currency value globally.
Table Source: BookmyForex.
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