The U.S. Dollar is often viewed as one of the safest investments in the Forex trading market and in terms of currency reserves as a whole. The United States Dollar is essential for facilitating global trade and is used as a reserve currency by many countries. Many trade deals between countries that do not use the US Dollar, such as Japan and France, are
still conducted in the Dollar. Given the Dollar's role in international trade it is always in demand. Further the U.S. Dollar is the most widely accepted currency in the world and is the official currency in numerous countries. Many other national currencies are also pegged to the U.S. Dollar meaning that a nation's currency rises and fails in relation to the U.S. Dollar. This helps smaller and poorer countries stabilize their own currencies.
The complicated nature of the U.S. Dollar and its relationship to financial trade and markets has made it a hugely popular currency for Forex traders and banking institutions. Indeed, most Forex currency pairs feature the dollar. Even in the face of the 2008 Financial Crisis, which started in the United States itself, the Dollar remained strong and in spite of the collapsing U.S. economy was looked to as one of the safest currencies in the world. How could the U.S. Dollar withstand the U.S. borne financial crisis while other currencies, such as the Euro, plummeted in-line with their own region's economy?
The Global Economic Meltdown and Global Currencies
The last few years have been exciting, if not terrifying, in the world of global finance. The 2008 Financial Crisis was the worst global economic crisis since the Great Depression and literally almost destroyed the global financial system. This global crisis would lead to numerous other developments, including the on-going Eurozone Crisis which has threatened the world economy throughout 2011 and 2012.
These various national and financial developments would also have dramatic effects on Forex markets. Some currencies, such as the Brazilian Real, Singapore Dollar, and Malaysian Ringgit, have performed well and have gained verse the Dollar and other currencies. Other currencies have seen a dramatic drop in value, including the Eurozone's Euro, and the UK's Pound Sterling. The U.S. Dollar has show a mixed track record, gaining against European currencies, among others, but dropping against some currencies in Asia and elsewhere. Still, even with a mixed record U.S. Dollar is still viewed as one of the safer investments in Forex.
Even as the Financial Crisis unfolded the Dollar remained strong and U.S. debts and U.S. Dollars were still seen as being among the safest investments. This drastically contradicts the Eurozone experience, among others, which has seen borrowing rates for many Eurozone members sky-rocket and the Euro's value plummeted against the Dollar and other currencies. Why has the U.S. Dollar's experience been so vastly different?
The Dollar and the Financial Crisis
Interestingly, in the midst of the global crisis, which started in the United States, the U.S. Dollar actually gained in strength verse many currencies. How is it that the country who's economic mess actually started the crisis somehow saw its currency gain strength? Even in the middle of the financial meltdown the U.S. Dollar was still seen as the world's safest currency by many investors.
Forex traders often find themselves in a tight spot. Banks and major institutions have to keep cash on hand. If a stock investor sees a market-wide decline coming it can liquidate all or a portion of his or her stocks. Currency trading offers a different scenario. Just about everyone, from banks to private individuals, needs to keep cash on hand. It's difficult, though not impossible, to get rid of all currency reserves, so traders can literally find themselves in the tight spot of having to chose a currency. When this is the case and the global economy looks to be on the verge of collapsing, the dollar suddenly looks like the safest investment on the market.
Traders weren't certain that the Dollar wouldn't collapse but instead that if it did it would signal an economic armageddon, at that point no currency would be safe. Many believed that if the dollar collapsed the world economy would go with it, whereas a collapse of the Euro or any other currency might be bearable by global markets. As such many traders and institutions turned to the dollar as a sort of currency of last resort.
Given this scenario many investors flocked to the Dollar even as the U.S. economy was on the verge of imploding. This might seem counter-intuitive and in some ways perhaps it is, however, because many traders and individuals must keep currency on hand, the Dollar looked like the least risky currency. Even if the Dollars own outlook was in-fact questionable, many investors simply felt that it was at least the best of the worst.
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