Question

Since the beginning of the year, the US central bank has lowered its key lending rate from 1.5% to 0%. In addition, the US government has injected nearly $3T in capital (14% of 2019’s GDP) into the US market through targeted loan programs, grants, and taxpayer-targeted stimulus payments. These fiscal policies have been more aggressive than what many governments have done around the world. Based on our studies, we would expect these actions, absent other factors, would weaken the US dollar relative to most foreign currencies, but the US Dollar Index shows the dollar has strengthened by nearly 4% since January 1^st. What other factors may have contributed to the USD strengthening in this way? Strictly for your reference, I have included a table disclosing the types and weight of currencies used in the US Dollar Index (no math required!).

Euro	57.6%
Japanese yen	13.6%
Pound sterling	11.9%
Canadian dollar	9.1%
Swedish krona	4.2%
Swiss franc	3.6%

Answer 1

1. The Euro is the domestic currency across the European Union. Weak economies in the EU like Greece & Italy have been pressurizing the EU to declare bailout packages for these countries thus adding pressure to the fiscal policy of the EU as a whole. Weaker countries have also been forcing for issuance of joint bonds. This reduces the creditworthiness of the EU as a whole & puts pressure on that currency

2. Japan has itself been struggling with negative interest rates for a while now. Therefore Japanese investors think of US dollar as the best alternative to earn at least a positive interest on their capital. Hence they seek more of US dollar to invest in US T-bills & G-secs

3. The pound sterling has witnessed pressure because of the Brexit movement. Concerns over the earnings forecasts in Britain loom thus making international investors cautious over their fiscal targets and growth rates.

4. Canada vastly depends on their exports to US. Hence they themselves bet on the US economy

5. Sweden is witnessing stress in their public pensions system & healthcare funds. Maintaining such an extensive pension system puts a lot of pressure on their economy

6. Switzerland: It is itself a part of the EU and is dependent on the banking system and export of high-end luxury products like watches. With banking all over the world coming in stress & forecast of demand for luxury products, diminishing, it puts pressure on the GDP of their country