In 2008, the US dollar strengthens despite the downturn in the economy around the world. Does anyone have any theories why? After doing my research, I believe that because the fed intervene by issuing currency swaps with major central banks all around the world. The foreign central banks then in return, bought US treasuries - however, why does this strengthens the US dollar?
Look no further than last week to find the culprits: Asian central banks.
When the US dollar goes under a certain value they will invariably intervene, sell large quantities of local values (Japanese yen being the foremost) and buy as many dollars as they can. The Chinese central bank, despite the yuan-dollar peg, will also intervene because they believe in the advantages (for their own export-geared economy) of a strong US dollar.
I don’t know much about other sectors but I can assure you large Japanese motorcycle manufacturers are literally shaking in their boots when they hear the words “US dollar”: their profits have literally plummeted since 2000 due to the ever weakening US dollar and their alternative markets for high end products (domestic and Europe) are a mess. I can only assume that it’s exactly the same for consumer electronics, industrial milling machines, composites etc. Add the never ending depression with ever dwindling sales (boy, I definetely should write something about it one day or another) and you will understand very well why their own central banks try to artificially prop up the US dollar.