Who is buying dollars, or is the US economyt coming to a grinding halt ?

I'm new here, so forgive my ignorance. Why is the dollar getting so strong ?

Amids all the financial turmoil in the US banking system, US government
sticking itself deeper than ever into debt, the nosediving stock market, and
the prospects of a stalling economy, you would think that few people abroad
have much confidence in the US dollar.

Still, the dollar rose 6% in the time since the *** hit the fan in
September and even more since it's low point in July. It even rose 2% in the
last two days. The US dollar is now stronger than it has been since Jan
2007. Oil prices (linked to the dollar) drop accordingly. The Euro drops the
most, but the Yen seems closer linked to the dollar.

What on Earth is happening ?
I'd like to know if this is a short-term effect, or if there is some
structural effect happening.

One explanation is that foreign investors (Chineese or Saudies?) are buying
up dollars by the billions, but that seems bizarre. They for sure don't
invest in the US stock market, nor are they buying realestate. This seems to
affect only the currency exchange rates, and the international commodity
prices, so it must be a cash flow issue. What reason would foreigners have
to buy cash dollars ?

I had macro-economics in high school, but that's a long time ago. I have
forgotten what the relationships are between currency exchange rates,
inflationary and deflationionary effects, interest rates and debt/assert
ratios.

So I have to rely on common sense.

The only common sense explanation for such a steep rise in the dollar in
such a short period of turmoil seems to be that possibly the US economy is
actually stalling. When businesses do not have short-term money, they will
start by reducing their inventory. Just cancel an order for new (foreign)
goods, or stop buying oil (and rely on the short-term reserves). That means
that dollars will not flow out of the US as fast as it normally does, which
means that from abroad it looks like the US is not consuming anything. That
means that there will be a shortage of dollars abroad, which means that the
dollar rises in value.

Does anyone have a better explanation ?

Rob



.

Quantcast