Why is the USDollar so strong against most other currencies despite the economic problems in the US?

Christmas will be a sad affair for many this year. As 2008 comes to a close, the economic state of affairs in the United States is frightening. The economy has slowed considerably, many people have lost their jobs. Companies are cutting back in the face of declining consumer demand. Consumers are spending less because they are losing their jobs or fear losing them. It's a vicious circle.

There has been a government bailout of banks, and now there is talk of rescuing the auto companies. Some are wondering who will be next. While all this has been going on at home, on the world stage the US dollar has been riding high. It has been gaining strength against most other currencies. Why would that be? Why would the dollar be strong if things are so bad?

Well, first of all, things may not be quite as bad as they seem. At least the government is doing something and not sitting idle while the ship sinks. Overseas, the economies of other countries are suffing the same plight as the United States - economic decline. The US is the largest economy in the world. It is the world's economic engine. When the engine slows down, the whole vehicle slows down.

The US is also extremely stable, politically. All countries have currency reserves - they hold their reserves mostly in US dollars, because of that stability. When their own economies start having difficulty, these other countries want to hold more of their reserves in the most secure, sizeable, and most stable currency - the US dollar.

Like everything in economics, the law of supply and demand rules. That law states that when the supply exceeds the demand, the price goes down; when the demand exceeds the supply, the price goes up.The more money there is chasing a limited supply of a commodity, the price of that commodity will go up. Countries wanting to hold US dollars must buy those dollars on the world currency markets, As more countries want to buy dollars, the price goes up. So the US dollars gains in strength.

In time it will come down again as other considerations come into play. For the time being, though, the US dollar is strong.despite the economic weakness.