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USD has been noticing a continued spike in the last week, especially so for the most traded pair EUR/USD. The rise of the USD has been a basis of conjecture for many analysts who have seen the currency being debased in the last five years and still continues to rise at an astronomical rate. In the last two years, U.S. Dollar index is up by 10% as compared to the other top currencies of the world. Read more on anyoption for details regarding the strengthening dollar and its impact on the Eurozone.

The strengthening of the US dollar in the last few days has been initiated by European Central Bank when they slashed the interest rates on June 5th. The president of ECB further informed that the interest rates will remain low for some time now. The governor of Britain, Mark Carney, also said that the British economy is too weak to fiddle with the benchmark rate of interest which was implied by the rise in long term bond yields. The other thing that supported the dollar was the 2.1% increase in the Consumer Price Index which did not hit the downward spiral despite the inflation. The increased cost of CPI has been attributed to 3.3% rise in the gasoline prices which has been the largest gain since last year.

What the experts explain is the main reason for the rise of US dollar is that it is the reserve currency of the world. The majority of nations use dollar as the currency to buy commodities such as oil which keeps propelling the US economy towards betterment. The monetary stimulus of the Federal Reserve can take the credit for keeping the dollar strong against other currencies. However, it has been speculated that when the stimulus weakens or ends, it can have strong impact on the currency.

With the dollar at an all time high, the vacations to US will be affected as it will be pricier than usual. The immediate spur of the rising dollar has been pointing towards the Federal Reserve’s purchases of the bonds that have been bought using the freshly minted currency. The quantitative easing has already augured well for the long term interest rates with yields rising to a 2.6% from the downward low of 1.6%. When the yields show an upward trend, it attracts more capital investments in America from other parts of the world which propels the dollar towards growth.

The deeper insight into the upward trend of the dollar can be seen in the overall health of the economy of America which is currently in a good shape. With housing market on recover mode, bad mortgage debts wiped out of the system and opportunistic job market with 195,000 employees added to the non-farming sector is a big boost to the economy. Despite the holistic growth, GDP has remained modest and will strengthen a bit in the coming days.  As per the IMF projections, the American Economy is expected to grow at a 2.7% rate next year. Even though this is not a classic improvement, but as compared to the other economies of Japan and Britain are not likely to do this well and with Euro zone still in the recessionary phase will keep America at the top.

The transatlantic gap in the interest rates of the both the markets are expected to rise as the monetary policies of America and Europe become clearer. With this trend, the dollar will rise further.

Standard and Poor’s has raised its credit outlook for the US economy from negative to stable.

In August 2011, S&P downgraded the US rating one notch from AAA to AA+, but now believes further downgrades are less likely as the economy continues to recover.

The news saw the US dollar strengthen 1.3% against the Japanese yen, and 0.2% against the euro.

But S&P is still concerned about the high levels of US debt.

The US Treasury Department, which had said that S&P’s calculations in making its initial downgrade were flawed, welcomed the latest action.

“We’re pleased that they are recognizing the progress in the US economy and fiscal results,” said Mary Miller, the Treasury’s under secretary for domestic finance.

Standard and Poor's has raised its credit outlook for the US economy from negative to stable

Standard and Poor’s has raised its credit outlook for the US economy from negative to stable

The rating agency said in its report the strengths of the US include “its resilient economy, its monetary credibility, and the US dollar’s status as the world’s key reserve currency”, while its weaknesses include “its fiscal performance, its debt burden, and the effectiveness of its fiscal policymaking”.

It noted “tentative improvements”, namely Congress’s avoidance of the “fiscal cliff” at the end of 2012 and the higher-than-expected tax receipts that followed.

But it also said the ability of policymakers to address medium-term fiscal challenges had decreased over the past decade due to a deepening of the partisan divide between Republicans and Democrats in Washington.

“We believe that our current <<AA+>> rating already factors in a lesser ability of US elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling,” S&P said.

It said the likelihood of it downgrading the US’s rating in the near term was now “less than one in three”.

The move came as the Paris-based Organization for Economic Co-operation and Development (OECD) said that economic growth in the US and Japan was outstripping that of the eurozone.

But most US analysts remained cautious about the upgrade and the equity markets were little changed in New York.

Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington DC, said: “The revised rating is positive news for the dollar but I do not see it being a major catalyst.

“This is just the latest indication that we are seeing a broad stabilization and improvement in the economy and ultimately the government’s fiscal position is improving, albeit slowly.”

Rival rating agencies Moody’s and Fitch have both kept their AAA ratings for the US.

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