The speculation that the US Dollar may rise on Powell’s testimony is somewhat of a surprise, but it is plausible and is the correct conclusion one should draw. It is also worth mentioning that the People’s Bank of China, who remains China’s currency capitol, is in fact a major player in world currency markets.
The question remains as to why the People’s Bank of China is pro-US Dollar, as they are largely the source of the very strong dollar signs. Is it a coincidence that the main world currency markets (those which the US must go through to gain entry) are dominated by the central banks of China and Russia?
Given the differing circumstances (where the US has been able to gain entry by resorting to hard economic reality), the dynamics of the Dollar and China’s policies, it would be reasonable to think that the Chinese central bank would support the strength of the US Dollar as a means of maintaining a more free flow of capital and trade, leading to a more free flow of trade and capital. However, any such efforts will be strongly constrained by economic reality.
The US dollar as a consequence has benefited tremendously from rising demand for US goods and services from Asia, the Middle East and Africa. It has also gained from (although not quite as much as) a historically low price level.
As is the case with all things economic reality, the US dollar has only been successful in its goal to become more desirable to the global market place by aggressive currency manipulation (with the help of the Chinese Central Bank), and there is no indication that China will alter this course. In fact, many observers believe that they will likely continue to play a key role in managing the flow of capital in order to bolster their own domestic position.
The recent era has seen central banks and corporations working together as never before to maneuver their currency rates in order to remain competitive in the marketplace. We have also seen the revival of protectionist and nationalistic rhetoric across the world, most notably in the United States.
In addition, we have seen an increase in globalisation of production and exchange, particularly with regard to currencies, and this has been good for the US dollar as well as many other currencies around the world. This has occurred alongside an increase in global awareness and interaction about economic and political affairs.
More importantly, however, has been the increase in the media’s exposure to economics and political affairs in general. Whether it is international terrorism or how a country is running its economy or even how a country is governing its government, we see the details of how those at the top in positions of power to manipulate and trade their way into the media spotlight.
Without a doubt, it has been a case of supply and demand as the economic realities (i.e. the demands of the market place) have also increased the value of the US dollar. Many people are therefore aware of these facts.
In addition, we now live in a world in which market forces dictate what currencies can gain in value. We also see the affects of economic realities in terms of the US dollar as the dollar has been appreciating in value against a wide range of foreign currencies.
The political stability of the American economy is also reflected in the dollar, as stability is a prerequisite for increased consumer demand and consumer spending. The strength of the dollar is also relevant in that the US Dollar can be used as a benchmark for international commodity pricing.
Ultimately, the economic reality is that the United States can gain access to the best (and the cheapest) goods and services from the economies of the world in which it is trading and conducting trade. The reasons for the dollar’s strength, and stability are a result of both economic and political reality.