Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
The US dollar has had some of its most tumultuous months in the past year. Volatility and exchange rates have borne down on it heavily, though recent weeks have been more optimistic. There has been a lot of uncertainty surrounding the USD, even as the economy in general stabilizes.
The latest news that will significantly impact the dollar’s value is the arrival of a new stimulus package. While still very early doors, President-elect Joe Biden has promised trillions in support for the economy. This has bolstered the dollar’s value on Monday — but is by no means a sure sign of strength for the dollar.
Dollar Could Be on the Path to Recovery
The dollar posted gains early in the week, pushing the pound sterling to below $1.35 for the time this year. On Friday, the US Dollar Index went up to 90.028, its highest since December 28. Signs from the labor market also indicate more stability and optimism.
There are a few reasons why the dollar is picking up. Federal Reserve Vice Chairman Richard Clarida made a statement saying that asset purchases would remain steady through 2021. And, of course, there’s the fact that greater fiscal support will be offered through the aforementioned stimulus package.
This has raised doubts both in favor and opposition to it. Many agree that the US economy and its citizens are in dire need of help. Others state that in the long-term, it could harm the US considerably, including increasing the risk of inflation.
Other evidence that the dollar is recovering comes from investors covering their short positions. These analysts believe that an extended rally could occur soon. There could be some truth to this as a new administration and new hopes enter the picture.
Investors Turn to Other Assets
As the dollar faces uncertainty, investors have been flocking to other assets, especially cryptocurrencies. Bitcoin especially has experienced a tremendous start to 2021, in addition to enjoying a 2020 that found new bottom levels. It continues to outperform every other asset class, including the S&P 500.
The primary reason investors are flocking towards other markets is because of a loss in faith in the US Dollar. Trade dilemmas, a pandemic, and a controversial presidential administration have persuaded investors to look towards more fruitful investment vehicles.
That’s not to say that the dollar is a poor investment. For those who know how currency trading works, the US dollar remains the most influential currency in the world. However, there is doubt, and the dollar is not thought of as a safe haven as it once was.
The path the dollar will take forward will depend deeply on Biden’s decisions in 2021. The effects of these decisions will not be known until many months or even years from now. The key takeaway is that the dollar is in a formative period, and investors must be wary of that — even when utilizing the top forex trading platforms.
It is important to remember that the stimulus package will not be the only influencing factor on the US Dollar. Furthermore, it will be a while before the entry of new money affects the markets. Most importantly, time will be the greatest decider in seeing how the dollar performs.
It is not long before Biden officially becomes president. It is then, and once policies have been stated, that we will know more about the dollar’s outlook. In the short-term, though, investors seem tentatively hopeful.
Where do you think the US Dollar is heading? Will the rumored $3 trillion stimulus package end badly for the currency? Let us know what you think in the comments below.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.