In times of uncertainty and turmoil, the U.S. dollar consistently proves itself as the world’s safe-haven currency, I wanted to take a quick look into why this might be.
USD has been and will be for a long time among the strongest currencies in the world, the US is world’s largest economy and a powerhouse in international trade and therefore the US Dollar is the most traded currency in the world accounting for a daily average volume of around US$2.9 trillion.
The value of the dollar is primarily influenced by US economic performance and demand for commodities, and this is no different for the other major currencies around the globe such as the GBP, EUR and JPY so therefore, when major events or incidents occur, you tend to see significant shifts in value across the FX markets. So, when there are events that cause uncertainty, stress and turmoil across the globe but particularly in regions with large influence over global markets then, there tends to be a major shift towards the USD, and it begins to strengthen significantly.
For example, below I have listed three events in recent times that have caused the USD to strengthen against the GBP:
GBP/USD rate Thursday 23rd of June 2016 = £1/$1.5013
GBP/USD rate Friday 24th of June 2016 = £1/$1.3230
COVID – 19
GBP/USD rate Monday 9th of March 2020 = £1/$1.3200
GBP/USD rate Thursday 19th of March 2020 = £1/$1.1408
Russia Invade Ukraine
GBP/USD rate Wednesday 23rd of February 2022 = £1/$1.3621
GBP/USD rate Wednesday 24th of February 2022 = £1/$1.3272
So why does this occur? The U.S. dollar has been a bedrock of the global economy and a reserve currency for international trade and finance and is officially known as the world’s reserve currency. It is backed by the world’s largest gold reserves thanks to the Bretton Woods Agreement. Instead of gold reserves, other countries accumulated reserves of U.S. dollars, countries then began buying U.S. Treasury securities to store their reserves, U.S. Treasury securities are considered to be a safe store of money. This in turn creates an extremely appealing atmosphere in times of uncertainty and makes the dollar a ‘Safe Haven’ currency.
Movements in recent times have also strengthened the USD, with inflation rates rising to more than 8% meaning that the government is expected to increase interest rates by 0.5%. Usually, a rise in interest rates means that the USD can be expected to strengthen as the economy can look more attractive to investors and tends to be an indicator of overall economic performance.
All these factors considered; there has been a noticeable shift towards the greenback. This is why we’ve recently seen lows of £1/$1.24 for the GBP and 1.0474 against the Euro – a 5 year low.
If you are exposed to the US Dollar, either for business or perhaps for private purposes, and want to either take advantage of the dollar strength or could use an FX specialist to help you achieve a high a rate as possible on your next transaction; get in touch with Ocean Capital Exchange Ltd today. If you import and have priced your orders higher than current levels then margins will be squeezed, you’ll therefore need to achieve the sharpest rates possible from your FX provider, it can take minutes to find out that you could be saving thousands…
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