US $ Exchange Rate

The US $ has been strong against Asian currency in recent month. Some possible reasons could be due to the following:

i) The US $ had been weakening against major currencies since the sub-prime crisis started in 2007. The weaken US $ has facilitated US exports and improved its balance of payments which have helped shore up the US $.

ii) The financial turmoil has now affected other countries. The US has already cut its interest rate 6 times to 2%. Other central banks are only starting to cut the rates just a few weeks ago. There are a lot of catch-up for the other central banks to cut their domestic interest rates to prevent the collapse of their financial systems. Because of this, the US $ has become relatively stronger currency for now.

iii) The collapse of Lehman Brothers has created the credit crunch. The institutions who have borrowed heavily on leverage will now have to get the US $ from the open market and this push up the demand for US $ and the exchange rate.

iv) The global financial troubles have caused the exports of many countries to drop due to severe dips in demand of major western countries. There is capital outflow and US is seen as a relative save heaven for the time being. This capital inflow to US $ will shore up the US $.

v) The collapse of the commodity prices in other major currencies have indirectly strengthen the US $.

vi) The hedge funds and institutional investors have been dumping their holdings worldwide as they face margin calls and redemptions. Since most of the funds are US $ based, they need to convert the fire sales proceeds from local currencies to US $ and repatriate the money home to repay panicked investors and banks. This also causes US $ to soar. This is a dramatic unwinding of the carry trade in US $.

While the liquidity has improved some what, it is not expected that the present situation be reversed in the one year to come.