For decades, the US dollar has been de facto currency for international markets. While investors occupy the American market with discomfort, an economist says that it could change, with major impacts in the United States and abroad.
Americans hoping to spend a vacation abroad this summer could be a surprise surprise.
Traveling through certain parts of southern Europe was a way to manage for your money due to the high value of the dollar, but things have changed in recent months. The dollar value has plunged approximately 9% since January, with a drop of 4.5% in April only.
It is normal that the value of the dollar, like any currency, increases and decreases, says HoldAssociate professor of economics and international affairs at the Northeastern University. But this recent trend is different, she explains, and that will probably have a major impact on the portfolios of Americans beyond travel costs.
The value of a currency systematically oscillates largely based on confidence in the economic growth of a country, fears of economic factors such as inflation and policies implemented by governments and banks. But Erten attributes the current value of the dollar to fall from the Trump administration pricecommercial wars and tax reductions offered in the so-called “great beautiful invoice” which could Increase federal deficit by billions of dollars.
“Lots of policies combined at this point where confidence in American policy becomes less and less to know if the actions of the government are really credible in terms of capacity to pay its debt,” explains Erten. “This has worried investors that the United States may not be the safest asset class and that perhaps (they) should move (investments) in the United States”
This is a classic case of supply and demand. All these disturbing indicators on the future of the American economy have led investors to sell bondsDropping the drop in dollar demand and pushing its even lower value compared to other currencies.
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Fear, Erten explains, is that a lower US dollar is only a segment of a chain of causes and effects that could lead to economic chaos.
“Everyone is almost sure that it will occur in increasing inflation, and when this happens, the Fed’s response will generally be a little more interesting to reduce this,” explains Erten. “Then, concern about this is that it could reduce economic growth.”
All of these economic factors may seem far away for most people. But Erten stresses that the Americans will feel the possible impact of a weakened dollar on their wallets.
“Now what will happen with the weakening of the US dollar is that all prices of imported goods will increase,” explains Erten.
This goes doubling for the Americans in the hope of traveling abroad.
“A lower American dollar means to buy the same products, you have to abandon more dollars abroad, so this will increase travel costs,” explains Erten.
On the other hand, international tourists in the United States will note that their motto goes a little further and is accompanied by more purchasing power.
“Everyone is almost certain that there will be an increase in inflation, and when this occurs, the Fed’s response will generally be a little more interesting to reduce this.”
HoldAssociate professor of economics and international affairs
The impact will extend to most imported goods, mortgage costs and car payments if bond yields continue to increase and the dollar value drops even more. However, Erten says that American exporters could get a boost because American goods become cheaper abroad. Consequently, a weakened dollar could potentially reduce the federal deficit, although atrten is uncertain, it will have a large part of a positive effect.
“In the sectors where the United States is already competitive, it is not very clear if it really needs this competitive boost,” she says.
All the uncertainty around the dollar goes against a global financial market which has long considered American currency as the safest bet. The dollar is the international reserve asset, and almost all other countries hold dollars in their financial portfolio to the point that 59% of all the world’s reserve currencies are in US dollars.
There are certain advantages that come with a lower dollar for countries related to the value of American currency, especially those with American denominated debts. A lower dollar means that “the debt reimbursement will be a little cheaper than it was,” explains Erten.
Now, “we are in a little uncertain territory,” says Erten, and governments and investors study the means to become less economically dependent on the United States
Alternatives such as an “multipolar international reserve system”, a combination of various global currencies taking a position of power, potentially divided by the region, have been discussed since the early 2000s, says Erten. Meanwhile, China began to raise the status of its currency, the renminbi, creating currency exchange transactions with countries like Brazil.
These conversations highlight a long -standing problem: a global financial system which largely depends on the decisions of money and the policy of a country.
“When the Fed makes decisions, these are just decisions for the American economy, but it affects all economies because everything else is linked to the American economy because the US dollar is the dominant currency,” explains Erten.
“The world wants to move away from the US dollar,” says Erten, “but there is simply not a very good substitute.”