Giving thanks for the rise of the US dollar

Giving thanks for the rise of the US dollar

This thanksgiving, we take a look at the fortunes of the US dollar over the last year

Despite some turbulent times on the political front, the US dollar has been making steady gains against a number of currencies this year. There have been peaks and troughs as political uncertainty and fears over the US-China trade war have made their presence felt. However, in general the dollar, as a safe haven currency, has been on a steady upward trajectory.

The President and the Fed

Donald Trump has repeatedly broken with presidential protocol and commented on the activities of the US Federal Reserve in relation to interest rates, and more specifically his dissatisfaction with their planned gradual rate increases. The dollar has remained largely unmoved by the president’s comments and the market appears to agree with the Fed’s approach. The windfall from major tax cuts and high employment suggest that there is unlikely to be any change in the Fed’s approach, and despite grumbling from the White House, the dollar looks set to remain strong.

Tensions between the US and China over trade

The escalating trade war between the US and China appears to have had little long-term impact on the value of the greenback. There have been gains and losses as the tariffs came into effect but have largely been short term blips. The trade war shows no signs of abating. There are signs that the changes in international trade are starting to bite, and the first to feel the effects of the new tariffs are farmers unable to export crops such as soya beans. Given that the agricultural belt is home to many Trump supporters, there is a chance that the president may seek a solution to the problem but if not, the struggles of America’s farmers could have implications for the dollar and the president if he plans to face the polls in 2020. 

USMCA on shaky ground

The US-China spat has overshadowed the creation of the USMCA, a new trade deal to replace NAFTA. There is a possibility that the deal may undergo some changes before it is signed now that the Democrats, seeking greater protections for workers and the environment, hold the majority in the House of Representatives.

A strong economy and a safe haven

The rest of the world has faced some challenging times – from the British government wrangling with Brexit to the slowdown of growth across Europe and many countries in the Far East feeling the knock on effects of the trade tariffs in China. The US dollar is making gains as stock and oil prices take a tumble. However, there are some signs that what goes up, must come down; gold prices are on the rise and this usually correlates with a drop in the value of the US dollar. 

What next for the dollar?

If there is an end to the uncertainty elsewhere and a pickup of growth, then the dollar may lose some of its strength relative to other currencies. If, for example, the US-China trade war starts to hurt the US more than China, the Japanese Yen, as another safe haven currency, may leap to the fore. Changes in government following the midterm elections may see plans for future tax cuts and growth stimulation packages frustrated by the House of Representatives as the new majority of Democrats make their presence felt. For now, the dollar has considerable strength, as a safe haven currency backed by a strong economy, but as the last few years have shown, anything can happen at home and on the world stage. The knock on effects of any changes could impact the value of the dollar and the flow of imports and exports.

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