This article is part of Wellesley Hills Financial’s Market Movements series, found in our weekly newsletter
The US Dollar Index achieved a three-month high this past week, as the currency continues to rebound from a 9-month rout that began shortly after lockdowns began around the world.
At the early onset of the pandemic, the Dollar behaved as anticipated. With increasing risk across the globe, there was an initial flight to safe-haven assets, driving the Dollar to multi-year highs; however, as the pandemic ensued and reliable mortality statistics assuaged fears of the worst, partisan views on how best to mitigate the impact to the country’s healthcare and financial systems quickly parlayed into global concern surrounding America’s ability to recover from the impact of the COVID-19 Pandemic.
Today, things look a bit different. Over the past three months, the number of daily reported COVID-19 cases is down over two-thirds, the U.S has accounted for over a quarter of all COVID-19 vaccinations administered, and a $1.9 trillion COVID-Relief stimulus was passed after months of back-and-forth. The latest guidance from the Federal Reserve forecasts U.S. GDP to grow by 6.5 percent in 2021 as unemployment falls to 4.5 percent. With the United States’ newly improved outlook, investors across the globe are betting that demand for USD-based goods, services, and investments will increase in the foreseeable future.
Before celebrating the USD’s strengthening, it is important to consider the larger implications. While a stronger Dollar may mean more ‘bang-for-your-buck’ it does pose some larger macro-concerns. A strong dollar means goods and services produced in the U.S will be less attractive to foreign countries, which may exacerbate our trade deficit. Additionally, as corporations in emerging markets are often required to borrow money in USD-denominated debt, the confluence of a strengthening Dollar and rising interest rates may cause a drag on future growth across the globe.
Although the pathway to a full recovery is still uncertain, improving conditions should give us all cause for newfound optimism.