On the eve of American Independence Day – it’s looking like a tough week ahead in the land of the free.
History teaches us that the Dollar’s ‘safe haven’ status is a pretty typical response in a crisis; when the going gets tough, the Dollar gets going. Normally, as the global economy struggles, everyone scrambles for dollars, making them a safe currency bet in hard times.
However, there are a couple of other factors in play right now that ought to be considered: growing global debt and COVID – 19.
Global non-US Dollar debt now stands at $12tn, much of it held by the ECB and Emerging Market Economies. A weaker dollar helps those holding this massive debt pile as it reduces the cost of servicing it.
So far, the Federal Reserve has managed to ease the upward pressure on the dollar by meeting the global demand with a fresh supply of dollars which, combined with easing of global concerns over COVID, helped to take the edge off and keep the dollar fairly strong.
But there’s still the pandemic problem. In the last week, the US saw the number of COVID-19 infections rise markedly; 40 000 new cases reported last Friday alone, the highest one-day figure so far. Multiple states are reintroducing constraints to stop this increase, which means that the likelihood of the US economy reopening fully is looking slimmer and slimmer.
As the US situation takes a turn for the worse, it will be interesting to see if the Dollar can hold firm and maintain its safe-haven status. A COVID increase elsewhere may just provoke another flight to safety – but if the US remains the worst affected country in the world, other currencies could see gains.
Contributed by Ralf Martyrossian – Ralf is a Business Development Manager at Privalgo, specialising in partnerships and property transactions. Along with passion and knowledge when it comes to financial markets and economics, Ralf is also a English Literature graduate from the University of Bristol. Besides from analysing currency charts, in his spare time Ralf enjoys boxing, cycling and cartography.
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