Recent political discourse in the United States has been centered around matters that relate to the economy. The necessary value of stimulus checks, the minimum wage, and the route towards the recovery of the job market have all been discussed. However, the reality is that economics is not a political matter. Bright promises made by some politicians, as well as predictions of doom by others, are not based in grounded facts.
The discourse masks the fact that we have very little idea of what is ahead for the US economy. It has been said over and over again that these are unprecedented times. Added to the devastation of COVID-19 is the recent manipulation of the markets by a new kind of investor – participants in online forums. There is no clear historical parallel and a ton of confusion.
We can at best get an idea of some of the possibilities, so that we can prepare for all eventualities. There are three potential scenarios which impact the very value of our currency.
Inflation
Inflation refers to the general rise in the cost of living in a country. In terms of the US, this means that a dollar buys you less than it did before. Basic necessities like food and water become more expensive. The value of the dollar has therefore decreased within the country. Inflation is usually driven by economic growth, when there is strong competition in the markets causing costs to rise.
Deflation
Deflation refers to the general decrease in the cost of living in a country. With deflation, a dollar now buys you more than it did before. Basic necessities become cheaper, and the value of the dollar has increased within the country. Deflation is generally caused by a weak economy, in which there is too much supply and not enough demand, causing costs to fall.
Stagflation
Inflation generally occurs in a strong economy. However, there is a third scenario, in which inflation continues to occur while the economy struggles and unemployment rates rise. In this case, costs are not rising due to competition but rather due to scarcity. Stagflation is rare, and generally only occurs in times when the normal driving forces of economies cannot be relied upon.
Where is the US economy headed?
As mentioned earlier, it is impossible to confidently predict the future of the US economy based on historical data. However, we can make some educated guesses based on what we know now.
First, the good news. The economy is not likely to enter a stagflation phase. The current unemployment rate is high, but will fall quickly when the economy reopens in its entirety. New businesses will arise, old businesses will recover, and people will want to spend their money as they did before the pandemic.
Of course, there is a huge caveat to the good news. Americans have far less money to spend than they did before the pandemic. Businesses have brought in smaller profits (or have lost money). Millions have spent months unemployed. And since the federal minimum wage has not been raised in line with the inflation rate, even minimum wage workers who remained employed throughout the pandemic can afford less than before.
According to all of this, we can expect the economy to grow even as many struggle to make ends meet. With the Democratic Party holding the House, Senate, and Presidency, we can also expect more intervention to keep struggling Americans solvent.
Thus far, we have spoken about the value of the dollar within America. But what about the value of the dollar in terms of other currencies? How might this economic outlook impact currency pairings? If you earn in US dollars and transfer your earnings into another country, you will need to know what steps you can take to maintain the value of your earnings.
What will happen to the dollar?
The inflation or deflation of currency within a country is only one factor influencing its value in the foreign exchange market. The US dollar over the past few months has been recovering in terms of foreign exchange. With more political stability, as well as the first phases of vaccinations taking place, the volatility of the dollar is decreasing.
For those who are regularly converting dollars, the volatility is still likely to cause fluctuations in the value of your transfers from one month to the next. The good news is that you can use FX derivatives for hedging in order to secure an exchange rate.
Hedging refers to strategies used to ensure you get the same foreign exchange rate for your transfers over the course of a certain period of time. These hedging tools include Forward Contracts, which use a calculation to provide a fixed rate based on the currency exchange as it is right now.
These strategies give you the stability you need when it comes to earning in foreign currencies or paying regular amounts in those currencies.
It is unclear where the US economy is headed, and the fate of the dollar is just as murky. However, you can at the least prepare for instability when it comes to foreign exchange rates with hedging tools.
