U.S Dollar rises: Its Rise against the European Debt Contagion

The perpetual socio-economic Greek unrest is keeping the financial markets on tenterhooks. The uncertainty over the policies executed to curb the spread of euro zone crisis has left the investors agitated. The reports of an impending European recession have made the investors across the globe take refuge in the U.S. Dollars.

Due to a flawed election in Greece, there is no immediate sign of truce between the warring Greek politicians to set up a new government. Moreover, Greek’s have rejected the debt reduction (austerity) measures imposed on them by the European Union and the International Monetary Fund (IMF) in order to get another bailout. The euro dipped further following the announcement from Greece’s president about conducting fresh elections.

Present European Economic Scenario

Germany’s robust exports in the first quarter of the year helped its economy to record a growth of 0.5%, surpassing previous forecasts. The economic growth of Germany, along with a 0% rise of French economy followed by the financial crisis of Spain and Italy has just prevented the European Union from slipping into a recession.

The trade in euro (the lowest since 18th January 2012) has gone down by 0.5% to $1.2761, while the session trough is recorded at $1.2752. The top performing European shares in the FTSE Eurofirst index fell by 0.7%.

The Bank of England (BOE) in its recently published inflation report has slashed its growth rate forecast from 3% to 2.6%. As a result of this report from BOE, the GBP (Great Britain Pound) came down to $1.5888 from $1.5987.

U.S economy: Its growth against the Euro zone calamity

According to investor sentiments, there is nothing special about the U.S and its currency. However, the recession-bound European Union and the fear of market regulation from central banks of Japan and Switzerland to control the depreciation of Yen and Swiss franc have left the investors with limited choice. This compelled them to opt for the green-back as a safer haven than other currencies.

The index of ICE Dollar (that measures the value of all the currencies against the Dollar) is on a steady rise. This is the best trade record of ICE Dollar since its inception in 1985. This growth in Dollar value has been the result of China’s slowing economy and the doubts on Greece survival in the European Union. Even other safe currencies like Yen, Swiss franc and Great Britain Pound are suffering a big blow because of the euro zone crisis. Recently, the Dollar was traded at $1.2716 (nearly 0.2% higher than Euro).

The Federal Reserve is formulating a slew of preventive policies to prevent any adverse effect on the US economy. This might stop the growth of the Dollar. The Fed is thinking of buying bonds to initiate its economic recovery program called Operation twist. These kinds of policies results in a weakened currency. This program is supposed to end very soon and the Fed will call for a meeting on June 19 and 20 of 2012.

Andrew Wilkinson, chief economic strategist of Miller Tabak & Co. based in New York, said that the impending global financial crisis has spurted a sudden rise amongst the investors who are buying the US Dollars. This is one of the reasons why the Fed is pursuing the bond buying program.

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