USA Dollar – The greenback is causing a lot of headache in the Foreign Exchange Market!
If there was one currency in the world that causes violent fluctuations in the market, that is the USA Dollar! Surely, no other currency in the world today causes upsets in other economies, as the USA Dollar. The reason for this is simple – Some time back, when the US economy was flourishing at all seams, a lot of countries decided to trade with the USA dollar, as the base currency.
It seemed fine till everything was fine. A sudden spate of sub prime mortgage defaults in the States, coupled with the impending Iraq crisis along with skyrocketing crude oil prices resulted in the foreign exchange rate to crash severely. Suddenly, Foreign Exchange traders reduced their exposure to the USA dollar, understanding that it surely is not a currency that is worth taking the risk.
The USA Dollar lost a lot of its sheen due to the domestic factors hitting the US economy. Suddenly, a developed super power was teetering on the brink of recession. It was quite natural for the other currencies to start reacting to this development.
For example, till July 24th, 2008, the USA Dollar was valued at 2.00 US Dollars per 1 GBP. News of the American economy in shaking terms caused this value to come down in respect to the Pound. The latest news is that 1 Great Britain Pound is valued at 1.789 USA Dollars!
The correlation is simple – If a currency is weak, it would need more of its own, to buy another foreign currency. For example, if the USA dollar were strong, it would have bought 1 British Pound by paying 1.5 US Dollars. Now with the news not good, a Foreign Exchange trader would have to pay 1.79 US Dollars to buy a Pound.