Despite the weakness of the US economy, high level of debt and downgrade of its long-term debt, the US dollar and the US Treasury securities continue to be in demand. How can a weak currency support a strong currency. Here's why:
Greek Crisis
The debt crisis in the euro zone, fears of default by Greece and breakup of the euro zone has been weighing down the euro.
Volatile Market
In uncertain times, investors prefer to cash over risky financial assets such as stocks. Global sell-off in stocks has increased demand for dollar and led to its appreciation.
Operation Twist
Fed's recent action of injecting liquidity by replacing long term bonds with short-term bonds instead of printing more money has prevented an increase in supply of dollar.
Safe Haven
The US dollar is still considered a safe haven despite all the troubles with the US and the central banks across the world continue to buy US Treasury securities.
Outlook
Indian Rupee to improve to Rs 46.3 to a dollar by March 2012, according to DBS. Consensus poll of Bloomberg estimates US/Rupee at Rs 44.1 by March. The euro too may recover some of its recent losses.
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