The eternal games of the USD

 

Overview

The ace, greenback, buck... there are so many names to describe the powerful dollar on the market. This currency remains the leader of all currencies across the world despite its fight against storms of deflations and typhoons of economic downturns. However during the past years, the Federal Reserve implemented policies and decided to operate with a Quantitative Easing method in order to combat creeping inflation and the pitifully low interest rate which nearly touched 0%.

When buck rhymed with bad

The dollar has been falling as the world's most poweful currency and setting off doubts in the international financial system since quite a bit of time. The falling dollar is not just a simple matter for experts and trillions of dollars in value have moved during a considerable amount of time, reducing the reserves of the world's central banks and lowering the value of all Uncle Sam's assets on the international marketplace. Analysts worried that a serious dollar selloff could create havoc in the markets and lead to a financial crisis. Many other factors have influenced the fall of the dollar, concentrating on the trade deficit effect. Firstly, the accounting scandals at Enron and many other companies shpwed many flaws in the U.S reporting and regulatory system, leading to falling confidence in U.S stocks, bonds and other investments. Stooping values in these markets which started in 2001 till the past few years and the consequent enormous investment losses further shook foreign investor confidence. As a result, foreign investors stopped sending a net inflow of investment funds into us markets. Instead, they began to liquidate their portfolios, causing a net funds outflow.

 

So, what kept the greenback greener as ever?

In spite of weak fundamentals, the dollar remained very strong on the market. The dollar benefited from its function as the world's primary physical currency, used as legal tender in many countries outside the United States and circulating as a parallel currency nearly everywhere. According to the Federal Reserve's estimate in 2013, about $878 billion of USD currency were in circulation and $560 billion was held outside the United States. Moreover, it seems

that the US is boosting its sentiment regarding interest rates, with Janet Yellen's speech last week over the health of the world's largest economy. Also, the dollar surged to a three-week high and government bond yields rose last week, one day after the U.S. Federal Reserve took a more hawkish tone in its assessment of the economy as it announced the end of its six-year bond-buying program.

The Fed's decision to halt new purchases of Treasury bonds and mortgage-backed securities had been expected. But investors were somewhat surprised by the central bank's expression of confidence in the U.S. recovery, despite global growth concerns. The policy statement prompted markets to rethink the growing consensus that the Fed's first interest-rate hike would not happen until late in 2015. However, the Fed did note in its statement that overnight borrowing costs would remain near zero for a considerable time.

Conclusion?

With the dollar back on track, the government and investors would be likely to push the greenback by increasing the level of economic activities and pumping more greenbacks across the globe's veins. We can therefore state that, even though it fell and rose, the dollar will remain the most traded currency on international markets and remain the number one legal tender for a long time.

However, for how long might the greenback maintain its standard? It is no secret that Beijing has been looking to promote the Yuan as an alternative reserve currency. This status would allow China cheap access to world capital markets and cheaper transaction costs on international trade, not to mention increased clout as an economic power commensurate with its rising proportion of world commerce. Will the Yuan and the Dollar fight for the throne? Only future will tell us…

 

Warren Tancredi By: Warren Tancredi
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