Why does the USD Perform well in risks?

In recent years, when some risk events occurred, the US dollar index showed an upward trend. Therefore, some investors listed the US dollar as a safe-haven currency. With the current epidemic impacting the global economy and financial markets, the dollar has recently shown an upward trend again, confirming this judgment again.

So why is the US dollar generally performing well in risk events?

For a currency to become a safe-haven currency, it needs to meet two basic conditions: one is that the currency can be freely exchanged, and the other is that the currency's exchange rate can float freely. The US dollar meets these two basic conditions.

In addition to the basic conditions, the US dollar also has the common conditions of other safe-haven currencies: First, the economy is large enough, and the US economy ranks first in the world; second, the United States has the world's most developed financial system, and the transaction volume is huge; The third is that the United States is politically stable and has a safe investment environment.

In addition, the US dollar has a unique advantage as a safe-haven currency. First, the US dollar has a dominant position in global foreign exchange reserves. According to data from the International Monetary Fund, at the end of the third quarter of 2019, the US dollar accounted for 61.8% of global foreign exchange reserves, much higher than other currencies, and it dominated the global foreign exchange reserves.

Second, the US dollar has extremely strong liquidity. The US dollar is widely used in the pricing of international commodity markets and international futures markets, and plays an important role in global foreign exchange transactions. According to a report released by the Bank for International Settlements (BIS) in 2019, the US dollar accounts for 88% of global foreign exchange transactions. %, much higher than the 32% of the euro and 17% of the yen. In addition, the US bond market has the strongest liquidity in the world, and investors can use the US dollar to conduct bond transactions without difficulty.

Third, the yield of US Treasury bonds has a spread advantage. US Treasury bonds, Japanese Treasury bonds and German Treasury bonds are considered as risk-free assets by global investors because of their extremely low default risk. However, after the European Central Bank and the Bank of Japan successively adopted negative interest rates and quantitative easing policies, the yields of German government bonds and Japanese government bonds continued to decline, and even became negative interest rate bonds, and the spreads with U.S. government bonds gradually widened. When a risk event occurs, investors regard US Treasury bonds as the world's best risk-free assets, and purchase large amounts of US Treasury bonds to avoid risks, increasing the demand for US dollars and pushing up the US dollar.