Why Does the USD Decline After Central Banks Flood World Markets With USD?
In case you missed it central banks around the world coordinated efforts to save the US financial system by flooding the market with US dollars to make more cash available to near insolvent banks. The question is asked, however, why does the US dollar depreciate against world currencies when this move is made?
Simply put, and it's only a simple explanation, when there is a flood of USD into the market that means there is greater supply of dollars. Greater supply means lower demand (Although in this case demand is slightly higher because so many firms need the cash.) Having said that, to investors there is plenty of supply therefore less demand for USD. Less demand, greater supply, all points to a depreciation because fewer people choose to hold US dollars. Price goes does when there is too much or not enough demand. Simple econ 101.
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