Tuesday , 18 June 2024

As the World is on the Brink of Chaos, the Mighty Dollar is Back

In this post, we will look at how recent world events have impacted global markets. Specifically, we will address the question of why is the dollar strengthens during times of war and try to make a US dollar prediction for the near future. We will also touch on how the Ukraine crisis has impacted US dollar to GBP and US dollar to Euro exchange rates. Finally we will also touch on how all of this effects anybody making a money transfer from USA to UK, or a money transfer from USA to Europe.

From COVID to WWIII?

It seems like an age ago already now, but as the champagne corks popped open to celebrate the transition into 2022 many of us breathed a deep sigh of relief. The previous 2 years living under the spectre of the COVID pandemic had been hard on most of us emotionally, physically and especially financially and the world looked forward to life after COVID.

Flash forward to March though, and it’s clear that the relief was short lived. The Russian invasion of Ukraine is already threatening to escalate into what some commentators fear will be World War 3 and Russian President Vladimir Putin’s casual threats to use nuclear weapons are making many nostalgic for the good old days of COVID-19.

The Ukraine war is already having severe economic repercussions. Firstly, the unprecedented sanctioning of Russia has sent gas and oil prices skyward (although they were already high) and the conflict may also impact Europe’s food supplies further down the line. Moreover, the conflict is seriously threatening the existing world order which is causing some disruption to financial markets.

Why Does the Dollar Strengthen in Wars?

Whilst it may seem counterintuitive, any disruption to global financial markets is usually good news for the dollar. The “dollar smile” effect means that in times of uncertainty, the dollar rises in value. This is simply because investors and ordinary bank customers are looking for safe havens and begin putting their assets into tried and tested bastions of stability like American banks.

On the contrary, other currencies have already suffered. The Russian Rouble has been gutted by the heavy sanctions and the Euro is also wobbling. The conflict represents a severe threat to Europe in every sense and this is already being reflected in ruptures to the value of the Euro. If the war was to spread to an EU state, it could even see the Euro dropping if not outright collapsing altogether so savvy forex traders are rediscovering the USD.

Another stable asset is gold. Gold is of course the single asset that has lasted the ages. It is a hard wearing physical asset, its value is universal, and in case of crisis, it can be packed into a bag and carried into exile. As such gold prices are also increasing as worried consumers begin stockpiling it for the first time in half a century.

What This Means for Americans

Let’s make this clear though, a healthy USD is good news for Wall Street but not necessarily for the 350 million Americans who use it each day. For one, a rise in the US dollar is bad news for American exporters as their international clients suddenly find that the goods they are buying become gradually more expensive. A rampant USD was one of the contributing reasons to the decimation of the American automobile and steel industries – both industries which are currently trying to revive themselves.

On the other hand though, a strong dollar means Americans have more purchasing power. As such it should mean that imported goods become that bit cheaper and it is also good news for American passport holders who decide that this is the right moment to indulge in a bit of travel.

The improving value of the dollar is also going to impact anybody engaging in international money transfers. For example, a Latin immigrant to the US who sends $200 per month back to their family may be delighted to learn that his family is able to get more peso’s than before from that same $200.

US Dollar to Euro Rate – Bad News for Ex-pats

Going the other way though, it will cause problems. For example, anybody who needs to transfer money to the US will now find that they need to send more of their original currency than they previously would have. In the case of an American expat living and working in Estonia, any Euro’s they send back to the States for taxes, mortgage payments or pensions, will simply not go as far. For example, as of today anybody wanting to send back $100 USD from the Eurozone will need to send €90.27 (plus any fees which will not go into here). Just one month ago, they would have needed to send more like €89 and so the trend is worrying for anybody doing serious business back and forth from the States.

Still, anybody looking to make a money transfer from USA to Europe will find that those previous green dollars translate into more Euros than they would have one month ago.

US Dollar to GBP

The Great British Pound has also seen some movement which is interesting. Remember that the British Isles are not connected to mainland Europe and that the country began distancing itself from the EU and the Eurozone in 2016 following the controversial Brexit referendum. Still the destinies of the UK, the US and Europe are deeply entwined.

The UK is less dependent on Russian energy than their neighbours on the continent and yet has still seen spikes in fuel prices. Furthermore, the City of London has been accused of helping Russia’s Oligarch’s launder money for decades prompting some critics to call for long overdue reforms. All of these factors may ebb into the pound’s value but for now it has seen almost 2% drop against the USD since the start of the conflict. That means that anybody looking to make USA to UK money transfers will see similar benefits as they would when sending to the Eurozone – this is a good time to make a money transfer from USA to UK.

US Dollar Prediction – Will The Rise Continue?

At the time of writing the terrible Ukraine crisis is less than a month old. Therefore it may be premature to be making too grand predictions about the future-scape of finance. A lot could happen over the next few months such as NATO and the US joining the conflict or some kind of intervention from China – both eventualities would have seismic effects on the markets. Also bear in mind that as ever, some analysts are predicting that the conflict may ultimately undermine the dollars supremacy but now for, the trend is going the other way.

Final Thoughts

We live in troubled times and little feels certain right now. Still, we now know why the dollar strengthens in wars and we have seen how the Ukraine crisis has effected US dollar to GBP and US dollar to Euro transfers. Whilst making a full blown US dollar prediction still seems premature, we at least know that this is a good time to make a money transfer from USA to UK, or money transfer from USA to Europe.