US Forex: Q1 Overview & Predictions
2022 saw the US dollar go on a bit of a rollercoaster. While it strengthened throughout the year and reached highs not seen since 2010, it began to weaken again, with many worrying about why and if it was able to recover.
However, the dollar is seemingly strengthening again, which is not only good for companies and businesses but also for foreign multinationals and citizens. Here is an overview of the US dollar and the benefits of a strong currency.
One of the driving factors that allowed the dollar and US forex to strengthen was the fact that in the face of global instability, the US economy found stability and kept it consistent. Considering the dollar is often viewed as a safe haven currency, investors were immediately drawn to this.
Even though the rest of the world was still struggling, the US continued to raise interest rates. Even though they were higher than the likes of the euro, Swiss franc, and the Japanese yen, the strong economy maintained balance.
Still a safe haven
As mentioned already, the US dollar has consistently been regarded as a safe haven currency. In simple terms, a safe haven currency is one that is assumed to retain and grow in value, even if the rest of the world is suffering.
This aided the dollar’s strength in Q1 and will assist in its future strength, as the war in Ukraine and the subsequent problems with oil led many international investors to head back to the US dollar.
The advantage that the US dollar has is that even in the face of economic uncertainty and problems, the economy and currency remain stronger than anything else.
The growth of the dollar over the coming 12 months is relatively unclear. Many experts believe that federal hikes are on the cards, but the United Nations has suggested that these hikes could lead to, or at least contribute to, a global recession.
However, US officials have said that these hikes will probably still happen if the economy stays strong. On the other hand, other economies are set to do the same thing, which would hopefully lead to the hike balancing out.
What investors are saying
Investors are currently worried about the current strength of the US dollar for one main reason; the increased price of exported goods. This is causing stress as it is a crossroads that many didn’t think would be a problem.
If the US dollar strengthens, the economy gets stronger, and there is more foreign investment. However, this will also lead to increased prices of exports, which would lessen trade and weaken the US’s position in the global trade market. Many believe this will give the likes of China, a competitor the US doesn’t want to give the upper hand to, an advantage.
Advantages of a strong dollar
Considering how strong the US dollar currently is, many are wondering what this means for them, especially on an individual level.
One simple benefit is that traveling will be cheaper. The US dollar is stronger than almost every currency, meaning no matter where you go, except the UK, you will be able to buy far more local currency with your dollar.
One of the biggest advantages of a strong economy and currency is the price of imports. Imports become so much cheaper when you can buy them in USD, and considering the US gets a lot of products, especially things like oil, from overseas, this is a huge plus.
Sentiment is strengthened
To keep your status as a safe haven currency, you need to maintain a strong and consistent economy. When the dollar is strong, it shows other countries and investors that the US economy is stable and is readying itself for potential growth.
This then raises sentiment, and more and more foreign investors feel comfortable putting their money into the US economy, which in turn, makes it even stronger.
Disadvantages of a strong dollar
A strong US dollar may seem like the perfect outcome, but it is a double-edged sword that can impact local economies as well as businesses.
While it is cheaper for US citizens to travel abroad, tourism takes a hit when the dollar is strong. The simple reason being that foreign currency is weaker against the dollar, and you can’t get as many dollars with your local currency as you would hope. While tourism may not sound like a major concern on a national level, the US is packed with hundreds of thousands of businesses that rely on it.
As mentioned already, unlike many other countries, the US actually produces quite a substantial amount of goods. If the US dollar is strong, these goods become too expensive for many countries to afford, and they often turn to cheaper alternatives, mostly from China.