With inflation at its highest in decades, however, dollar buyers are not in short supply. What are the causes of this strange phenomenon?
In many cases, the phrase “the dollar goes up” is used, but in reality, it is not the dollar that goes up, but the national currency that goes down. For example, if the dollar rises in Venezuela or Argentina , in most cases, the problem usually lies in a loss of confidence by citizens in their national currency. In other words, people are buying dollars because they think that their savings are not safe in national currency due to the mismanagement of money by the authorities of the country in question. Here I am not going to talk about the dollar in that context. Here I am going to talk specifically about the US Dollar Index (DXY).
It might seem paradoxical to talk about an inflation problem and, at the same time, talk about a strengthening of the currency. We well know that in the Latin American case the rise in the dollar is practically synonymous with inflation. The reader could be confused. Similarly, Latin American crises tend to be stagflationary (high inflation, low growth). However, this is not always the case for crises in the United States and Europe .
On the other hand, with such high levels of inflation, buying dollars right now might seem like a pretty foolhardy decision. After all, very few people are willing to buy an instrument that is losing value. To add to the confusion, it seems that the current strength of the dollar is presented as bad news . In fact, in the last quarter, several US technology companies stated in their reports that they would surely record revenue losses due to the price of the dollar. This reaction feels counterintuitive, because we are conditioned to think that the adjective “strong” always denotes something positive.
The dollar is the reserve currency of the world. Additionally, the dollar is the most widely used currency in international trade. Why? Well, largely because of the size of the US market. They are the most important consumers . On the other hand, by the military power of Uncle Sam. We must remember the importance of the oceans and seas for world trade. Someone has to ensure the safety of the goods. Lastly, the dollar is important because of the enormous importance of the American financial system . They are the great financiers . The stock market, the bond market, insurance, credit cards, bank loans, etc.
Now, country A sells oil to country B. And they do it in dollars. Why? Can’t they use their own coins? In theory, they certainly can. But, who financed the exploitation of the wells? Who insured the ships? If the money left New York or London, surely the obligations of country A and country B are denominated in dollars. Consequently, the strength (or weakness) of the dollar affects debts, credit, corporate income, exports and imports.
China is weakening its currency with liquidity injections to improve its exports. The Japanese are doing the same. And Europe is in recession with a war in its backyard. The US Federal Reserve is certainly raising interest rates and they are shrinking their balance sheets to contain inflation. Therefore, investors panicked. In other words, the Dow Jones, the S&P 500 and the Nasdaq are falling. Why? Fear, doubt and uncertainty cause investors to become more conservative. Which usually means that they seek refuge in stable assets and avoid the risk of volatile assets. Bitcoin was hit particularly hard here.
For most investors, the scarcity of a code, the security of a key or the computing power of a computer network matter three cucumbers. The most important thing is always the price. If the volatility is high, it is a risky asset. If stability is high, it is a safe asset. As simple as that. Because here what matters is the financial risk. It is very possible that for different reasons we do not trust Uncle Sam. Suddenly, we are libertarians or anarcho-capitalists. Suddenly we really like the ideas of Ron Paul and the ideas of the Tea Party movement. But I’m afraid that doesn’t matter too much. Because the markets move by majority. And, like it or not, the evidence is telling us that most still trust the dollar and Uncle Sam.
In times of crisis, most investors take refuge in the dollar and T-bonds. Just one year ago, the price of Bitcoin stood at $33,113.0 per unit. Today, the price is close to $19,955.5 per unit. That’s a reduction of more than a third in one year. During the same period, inflation in the United States has been 7-8% (+/-). Many investors would rather earn little by buying dollars and receive interest than take the risk of losing money on more volatile investments.
Monetary stability is important, because our expenses and debts are stable . If we take on dollar debt, and invest in equity assets, we’re in trouble when asset prices plummet. During a recession, individuals, companies, corporations and countries must ensure that they have sufficient liquidity to meet their commitments at the time of collection. Otherwise, an epidemic of bankruptcies and bankruptcies could occur.
Suppose a young married couple has $40,000 in savings. They have two children, a mortgage on the house, a debt on the car and well-used credit cards. There is talk of recession on the street. And many companies are talking about cutting payroll. Is it time to invest in the stock market? Is it time to “buy the dip” in Bitcoin?
The dollar is going up, because everything else is going down. And investors are betting on the United States because, despite its problems, it still appears to be the safest place by comparison. Families are fattening their emergency fund in the event of a stronger-than-expected recession. And investors have plenty of cash in their portfolios waiting for the recovery to start. Many are like the little ant in the cicada fable.
Link: https://es.cointelegraph.com/news/why-is-the-dollar-going-up
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