U.S. Dollar is the Winner

At the beginning of the last year we were arguing that the U.S. dollar could lose its position as the most popular reserve currency in favor of the Euro. But in the second quarter of 2008 the dollar suddenly started to rebound and began one of its biggest rallies in years, going from 1.6 to 1.2 dollars per euro in only three months.

What was behind this unprecedented move and how the U.S. dollar managed to decline to all time lows?

Back in 2006 and 2007, several countries were considered to be in much better economic condition than the United States. For example, in that period the Euro Area economic growth surpassed that of U.S. and as a result, international investors were more willing to hedge dollar exposure with investments into the Euro Zone. Moreover, even though some economic slowdown was becoming visible in the United States, the majority of economists believed that the slump would be short and there would be no chance of spilling over to other countries. However, few months later the situation changed drastically, and the underestimated slowdown in the U.S. economy was soon transformed into a major global recession. More importantly, as everyone was being hit by recession fears, the U.S. dollar was once again seen as a safe haven currency, supported international demand for U.S. government securities.
In 2009, The U.S. economy boosted by fiscal and monetary stimulus programs promised by the new U.S. administration is likely to be the first one to emerge from recession and although the U.S. dollar slumped against the euro during the final weeks of 2008, due to the pressure from monetary policy, including quantitative easing, we believe that its weakness is only temporary.

Anna Fedec, contact@tradingeconomics.com
1/13/2009 7:07:06 PM