What make the US dollar strong against other currencies?
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Why do people “buy” dollars, strengthening the currency? Here’s two (of many) reasons:
1. The local currency is risky. Holding Zimbabwean dollars is risky, so I want to buy USD.
2. In order to invest in the US, I need USD.
So what’s happening now is a mix of both. The world is going through a lot of turmoil — Ukraine, Russia, covid, oil shocks, food shortages, etc. In an environment with so much uncertainty, people look for a place where they’re more confident. That tends to be the United States. The whole global financial system is grounded in USD, which is supported by the largest economy on the planet, so it’s a relatively “safe” place when the whole world is uncertain. Despite what you might see on social media, the fundamentals of the American economy are still very solid: productive workers, lots of resources, good education, stable government.
Furthermore, the US is taking aggressive action to stabilize its currency by fighting inflation. The main way this is done is “raising rates” — you might have seen someone say “the fed is raising interest rates.” So if a US bond offers (hypothetically) 3% interest, and a Japanese bond offers 1% interest, I would buy a US bond. As the US raises rates faster than other countries, it makes these types of things even more appealing. More investment increases demand for dollars, bidding up the value.
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