We know that the US dollar exchange rate increased during the global recession while usually when an economy performs weakly its currency should depreciate. How was there still a huge demand for USD in foreign markets even when subprime mortgage crisis was at its peak.

  • $\begingroup$ Consider the fact that our economy was not the only one that fell into recession. How do you think our currency might have performed compared to other countries' currencies, if you see that the dollar appreciated during this time? $\endgroup$ – Kitsune Cavalry Nov 25 '15 at 21:58
  • $\begingroup$ Well, that's what I did not understand. The crisis originated in US financial market got amplified and transmitted to other economies because there was a huge demand of USD as credits froze in US. Frankly speaking I did not understand this completely. $\endgroup$ – Sub-Optimal Nov 25 '15 at 22:28

Because dollar is a major reserve currency. When a financial crisis occurs in other countries, like India, Brasil, Russia, etc, everyone sells stocks and liquiates assets to raise cash. But the cash they want to raise is usually dollars or euros. When a crisis hit the US, everyone started selling assets FOR dollars. I.e. they were buying dollas for stocks, trillions of dollars worth. This demand for cash appreciated dollar. There was a multitude of other factors involved, as discussed in this paper: Dollar Appreciation in 2008: Safe Haven, Carry Trades, Dollar Shortage and Overhedging http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1519814

After Fed's relatively successful monetary policy decisions, the US economy recovered faster than the economies of the EU and Japan, other reserve currency emitters. Then it was natural for dollar to continue strengthening.

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    $\begingroup$ Your second paragraph starts out with stating that it was a short term effect but ends with the effect continuing. Maybe you can reformulate it? $\endgroup$ – HRSE Nov 26 '15 at 4:07
  • $\begingroup$ Thanks! I was on my phone at the time and it is just not the same as having a big screen and mouse. I also added a reference with some research on the subject. $\endgroup$ – Arthur Tarasov Nov 26 '15 at 4:25
  • $\begingroup$ @ Arthur Tarasov: Could you please explain the 'dollar shortage' reason of appreciation as given in the paper you have mentioned. Thanks in advance $\endgroup$ – Sub-Optimal Nov 26 '15 at 20:21
  • $\begingroup$ @Abhinav Arya: Financial crisis is basically a dollar shortage or cash shortage in general. It occurs when too many companies run out of money to make debt payments. As everyone rushes to refinance and sell assets for cash, a shortage of cash occurs. Whenever there is a shortage of something, it appeciates in value, including dollar. If it sounds obscure, I recommend reading some general articles on financial crises to better understand the processes behind them:google.com/… $\endgroup$ – Arthur Tarasov Nov 27 '15 at 2:13

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