Recent news has shown that the power of the greenback is becoming a major power again. This has both good and bad aspects to it. It’s good because it gives more power to people using the currency and brings stability to the economy. Then there’s also the fact that precious metals will suffer from the increase in valuation.
Here is some history on the U.S. dollar and importance tied to it. Even though the vast amount of money traded per day is electronically, there is actually $1.3 trillion in circulation of actual physical currency. The Federal Reserve has put its estimate that over sixty percent of these notes are traded outside of the country and are held there. This fact doesn’t only show that it is the physical currency of choice throughout the world but also the official currency for many smaller nations. It is also a good place to store value during inflation or political turmoil in other places around the world.
U.S. Treasuries Market
All across the world the US Treasuries market is the largest and greatest liquid financial market. Since the 1970’s foreign nationals everywhere have used these securities and accumulated them and now own around half of the United State’s public debt. The more foreign demand for US currencies is what sets up the value for the US dollar.
There are a number of factors that brings foreign investment in the USD. Ever since the Asian financial crisis in the late 90’s, banks in emerging economies began to stockpile US dollars in a form of protection against inflation and volatility of other currencies they might be dealing with. The United States is one of the greatest investment options in the world filled with bad options for foreign investors. The relative safety of the dollar is what brings people back to it because it is predictable and stable.
Domestic owners of public debt also provide a powerful check and balance in regards to the national government. The government must maintain its responsibilities over its reserves. This boosts the currencies appeal as opposed to other foreign currencies out there. Therefore domestic ownership boosts the status of US treasuries and keeps the US dollar where it is today.
Driving US Dollar Strength
The federal interest rate was partly behind what was rallying the US Dollar to have increased strength over the past few weeks as the effects begin to take hold. The dollar index, which measures the USD against a group of other major currencies, was up some 1.3 percentage points at 99.158 and is on its path towards having its biggest gains since October of 2015. Its also outpacing the Euro in gains which dropped 0.8 percent. The Euro is at $1.0848 and this shows how the Fed and European Central Bank are beginning to take different paths on regulating their currency. With this rise in US treasuries this will put more strain on different types of commodities like precious metals and oil and that is one of the factors with the dollar growing in power.