by Daniel Costello

Jesse Zink of South Africa is paid in U.S. dollars, and the dollar has been rising pretty steeply compared to the South African rand. He wants to know why:

It seems that since the real crisis in the financial markets began last fall, the dollar has only strengthened against the rand and I've had more money to spend. It happened rapidly and was notable, at least 20 percent. I have no complaints about the extra rand in my wallet, but how come the dollar didn't weaken as virtually every other indicator did?

 

It may be counterintuitive, but there are reasons the U.S. dollar has appreciated against many currencies, including the South African rand, recently. For starters, even today, many investors around the globe believe U.S. Treasury bonds remain the safest investment out there, and they've been buying a whole bunch lately.

When so many investors run to safer investments such as Uncle Sam Treasury bonds, it means they have to dump their other foreign assets to free up cash for buying the new bonds. Before they can make the purchase, they need to convert their foreign currencies like Euros, Brazilian reals or Indian rupees into dollars. The demand for greenbacks drives the dollar up.

Things may stay this way for a while. (More good news for you, Jesse.) Many investors appear to believe the U.S. will be quicker to recover from the economic downturn than other developed and emerging markers. The U.S. was the first economy to falter, and President-elect Barack Obama seems more inclined to ramp up budget deficits in an attempt to encourage an economic recovery. (Meanwhile, other countries appear more hesitant by the day to blow the bank in order to combat their economic downturn.)

One more thing: this is not to say the U.S. doesn't have some long-term problems to keep in mind. Once the crisis ends, and other countries begin to recover, this whole scenario is likely to reverse and the dollar will fall. By then the U.S. will have a few more trillion dollars in debt and a much larger budget deficit to weigh it down.