I don’t understand this. The global economic issues that we are now seeing started with the sub prime mortgage crisis in the US. But the US dollar is stronger than what it was before with all the major currencies of the world losing value against it. The Canadian dollar is down by almost 20% and so are the Australian dollar and others.
The whole problem starts in the US and nothing happens to its currency? What is the explanation in layman terms?
When things look scary, people look for refuge in the biggest, most stable vehicle they can find. People really want dollars(and Euros) now because they figure those are the most likely to retain value. A bad choice or two from the govts of other smaller countries, and the entire economy might fail, leaving their currency worthless. But people believe that the dollar will always have real value because of the sheer economic power of the Government that makes it. It’s a self-reinforcing thing really; People just believe that the dollar has real value and less risk, which directly makes the dollar have more value and less risk. It’s a quirk of faith-based economies when there is no standard to back it up.
One thing is clear: the Canadian goes up and down with the price of oil. It is not widely known, but the US imports more oil from Canada than from Saudi Arabia. With the price of oil halved since it got near $150 earlier this year, the Canadian dollar has sunk back to near where it was. I read yesterday that OPEC will reduce production by 5%. That should help the Canadian dollar.
That said, I still don’t understand why anyone would prefer US dollars to Euros (or Swiss Francs).
The dollar remains the leading trade currency, and the Eurozone is hardly a picture of health - nor Switzerland, whose banking industry is being battered. US Treasuries remain among the most heavily traded instruments, and relative to other government debt out there remain perceived as stable, and they are US dollar denominated. With a flight to safe harbours, comes dollar demand. Note there is no single Eurozone equivalent of the US treasury as issuances are by national governments, and the tensions within Eurozone about inflation policy, and high existing debt levels can cause some caution (e.g. Italian or Greek paper is hardly a safe harbour, although German and … well German might be. French could be if they were not so inclined to talking wild populist talk).