Effects on the dollar by US government injections into the economy

[penninah]

Hi there,

The US government has bailed out its citizens and enterprises by giving them money. What effect, if any will this have on the dollar's value?

 

[Sam Farrah]

Hi Penninah, in normal circumstances you would see dollar liquidity which would lead too a decrease in the dollars value, which we have seen in the last few weeks with risk sentiment shifting slightly. 

However, due to the risk off nature we have seen in the last few months because of the coronavirus the dollar has surged due to it being a safe haven.

 

 

[Lindsay R]

Hi Penninah,

Yes, the Federal Reserve has poured about 2 trillion into the US economy in a bid to keep US enterprises, markets, and citizens afloat amid the economic devastation wrought by coronavirus in the recent months. 
FED’s generosity has sparked fear and forecasts of devaluation of the dollar coupled with massive inflation. But is this likely outcome?
Will the Bailout Cause Inflation and Devaluation?
The US has the privilege of having the global reserve currency. This means central banks across the world hold huge US dollar reserves which they use to shore up their currencies on the forex market and to pay international debt.
And because of the 'reserve currency status' of the dollar, the global commodity trade is conducted using US dollars. International traders and central banks don't keep their dollars in vaults. Instead, they use their dollar reserves to buy US Treasury bonds. By buying these bonds, they in effect lower the borrowing rates for the Treasury. Lower rates allow the US to run persistent and massive budget and trade deficits without devaluing the US dollar.
Besides, in times of crisis, bond and stock investors revert to buying Treasury bonds. All these explain why the interest rates on Treasury bonds have plunged to record lows and the value of the US dollar has shot up sharply. 
 

 

 

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