Many are wondering whether geopolitical tensions could weaken the U.S. dollar and what the possible consequences are of this happening.
In the UK, Prime Minister Theresa May has called for a snap election to strengthen the government as Brexit is coming into the forefront of people’s minds.
The market reaction is very revealing – the British pound has improved despite other currencies not, like the dollar and the Euro. While the pound gains, the dollar weakens and this has connections with Trump’s so-called ‘geopolitical games’, causing big insecurity in the U.S.
While many are nervous about the situation, on the other hand, this level of political uncertainty has been said to please China. This is because it puts pressure on the value of the dollar and many European elections that occur may also affect the value of the U.S. dollar. The values between the Euro and the U.S. dollar are similar indeed and the two currencies trade very closely.
It seems that the ideas of a prosperous and high-dollar future for the U.S. is a thought of the past. The Fed has some difficult decisions to make in the future – it can’t raise the rates too quick, nor can it risk an excessive U.S. dollar deflation.
If Europe is to stay together this year then the Euro will strengthen against the U.S. dollar. This means that if the Fed continues to increase their rates, this will make European commodities more competitive in the American markets. If Trump decides to impose higher tariffs, this will be detrimental to European manufacturers. As well as that but this decision will affect China and Japan as American businesses rely a lot on exports. Unreasonable tariffs will spark controversy.
The U.S. as a whole need to retain control over the value of their currency and this is the most important measure that the country needs to remember. The U.S. dollar needs to be balanced to not have any consequential effects – it can’t be too high nor can it be too low. However, the U.S. needs to keep on top of their debt – both personal and public – and so maintaining a strong dollar is key to controlling the debt. The recent geopolitical uncertainties have caused so many people to be hesitant and weary of the U.S. market, and from analysing it, it’s quite clear to see why.
One of their strongest points in their favour is that the U.S. dollar is the principal international reserve currency, so other countries have been known to buy the U.S. dollar in bulk. This means that keeping good relationships with our trading partners is absolutely important, otherwise, the dollar may suffer an abrupt devaluation, which could cause chaos in the U.S. economy, to say the least.
Written by Gemma Smith