3 Reasons Why the US Dollar is a Safe Bet

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American flag and dollars. Close up.

Currencies are one of the safest investment options around but they usually don’t offer a big return. Compared to top tier stocks where you receive a dividend regularly, currency investments typically take time before any significant return can be had. Nevertheless, currency investments can offer a considerable upside in the long haul.

For those taking a forward looking approach in currency investing, the U.S. dollar is a very attractive option. With interest rates projected to increase in the 2nd half of the year year and with quantitative easing coming to an end, many investors are flocking to the U.S. dollar.

But with volatility in stock markets and a slowing global economy, may are asking if the dollar remains to be a safe bet.

To empirically answer this important question, we need to look at the factors that drive the dollar, these include demand, sentiment and economic indicators.

DEMAND

In an effort to prop up growth in the region, the European Central Bank (ECB) is planning on purchasing $1.16 trillion in public and private sector bonds this year. These bonds are often paid in U.S. currency, upping demand for the greenback.

Except Germany, most countries in the Eurozone are experiencing high unemployment rate, and the ECB is hopeful that the move will help ease the situation. But as the ECB buys more bonds, the more the greenback gains against its rivals including the Euro. The resulting situation doesn’t bode well for the region’s single currency as far as its standing against the U.S. dollar is concerned.

Meanwhile, in Asia, the Bank of Japan (BOJ) recently accelerated its yearly purchases of government bonds from 60-70 trillion yen to 80 trillion yen. The move is part of a broader effort to address deflation. But with Japan being home to the oldest consumers in the world, deflation is but a foregone conclusion. Just like the quagmire the euro is in, the BOJ’s measures will likely not help the yen against the U.S. dollar.

Because of high demand for the greenback, many traders are bullish on U.S. dollar at the moment, and that sentiment will likely to last for a considerable amount of time.

SENTIMENT

The expectation of higher Federal Reserve interest rates in the second half of the year is causing the dollar to gain broad support, making it stronger against rival currencies.
The rising U.S. interest rates is in stark contrast to loosening monetary policies taken by the Eurozone and Japan, making U.S.-denominated assets even more attractive to investors than other currencies and elevate the American currency even higher.

A stronger U.S. currency makes gold and other safe-haven assets less appealing as they become more expensive to maintain for holders of other currencies.

ECONOMIC INDICATORS

Government statistics such as GDP data, consumption data, payroll data and other market and economy numbers, taken together, determine determine the health and outlook of the U.S. economy.

A strong or healthy economy encourages domestic spending, which in turn, ups the numbers for U.S. consumption.

Projections for the U.S. economy for this year and the next is relatively healthy. The GDP growth rate is expected to remain within the 2-3% range, which is typical for a mature economy like the United States. Unemployment numbers is projected to be move at predictable rate, and inflation or deflation are expected to be within manageable levels.

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