Why USD is a Safe Haven During the Crisis

FinanceStocks, Bond & Forex

  • Author Giorgi Mikhelidze
  • Published August 6, 2020
  • Word count 879

The year 2020 has been a turmoil for the whole world. The rocky start in international politics with the United States military assassinating General Qasem Soleiman in Iraq has put the world at high alert as Iran was threatening a war which led to price fluctuations on Oil. Shortly after the global pandemic has led to the struggle of even the world’s leading economies.

The outbreak of the novel coronavirus has caused one of the biggest health hazards of the modern history of the world. Most of the countries in the world started to close down their borders in order to either contain the spread inside their own territories or just keep foreigners from transferring the virus unknowingly.

The world is not as bleak as it looks though. Some European countries started opening up as the drop in the new COVID-19 cases is manageable in the end. Social distancing laws have also eased which gave the service sector a headroom to breathe and start making money. Although international flights are still restricted to the point of tourism industry not being as viable as it used to be. But, people are surviving, and in the end, that is all that matters.

Since the unemployment rate is rising to record high in developing countries like the United States of America for example with the highest number of COVID-19 cases in the world one would think that the currency market should also be crushing, but in reality, it is not. On the contrary, this is the best time to start investing in some currencies.

While new coronaviruses are spreading quickly across the whole nation and causing huge drops in the global economy the US dollar is fairing surprisingly well and is viewed as one of the safest assets to invest in. There is more than $1.8 trillion USD circulating around the world at this moment. At one point it even soared 4% on the US dollar index.

This is not caused by smaller investors though. Most of the global financial institutions like federal banks are keeping a lot of USD reserves with large parts of international transactions being done in the USD.

Why is USD so reliable?

Even in the face of protests caused by the death of African American male, George Floyd, at the hands of Minneapolis police department where he was choked to death on live camera while begging for a room to breathe the US is considered to be a politically stable nation.

This fact says a lot of considering the peaceful protests quickly turned into violent looting and rioting sprees in many states of the United States with police forces clashing into civilian organized groups at every corner.

It is worth noting that this belief in the stability of the United States dollar is coming from the rigorous practices that financial institutions all across the country are leading. The liquidity of USD is one of the best and volatility doesn’t fall short as well. It is not expected for the price to fluctuate drastically in comparisons to other currencies like Turkish lira for example or Argentinian peso. This has been recognized fact not only by the outside world but US politicians as well. In 2019 before the coronavirus pandemic started shaking the world the U.S. Treasury Secretary Steven Mnuchin came out with a speech that can be equated to him boasting about the stability and influence of the US dollar. He said that he takes huge pride in the fact that a lot of people across the world are utilizing dollar as a reserve currency and the fact that it bears a strong value.

It is worth noting that the official currency of the US is largely utilized outside the boundaries of the country. This has been true for almost a century now after Gold Standard lost its trust all across the world since the First World War. A lot of countries like Great Britain started taking loans which they haven’t done ever and these were taken from the United States. Even after the Second World War, the case was with the US when a lot of funds came from that very nation to rebuild the whole of Europe. President Nixon is highly regarded as a person solely responsible for destroying the Gold Standard. On August 15th of 1971, he announced that the US would no longer convert the dollars to gold at a fixed value and thus completely abandoned the gold standard.

There is around $1.8 Trillion in circulation all across the world at this moment. Even more, it is widely believed that more than two-thirds of $100 bills and almost half of $50 bills are held solely outside the United States of America.

It is also true that the US model works on transparency while other huge world economies like China suffer from high government interference. They are plagued by dishonorable financial practices that benefit the ruling party of the republic. European Union and Euro being the second candidate but suffering from much higher volatility which makes it less of an adoptable currency. Lots of countries in the EU are still retaining their own currency as sometimes adoption and transformation may lead to economic problems, external shocks, as well as big changes in the competitive positions in the domestic market.

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