Brexit impact on exchange rate of dollar
Author: Dziennik Zwiazkowy
Decision of the British citizens of leaving the European Union, has caused significant changes in the currency market. The pound declined to its thirty-year minimum against the dollar. What can the situation of the American currency look like in the next months? - a comment from Marcin Lipka, Cinkciarz.pl currency analyst.
In May, we took note that the dollar will most likely gain value, regardless of the referendum results. On one hand, the decision of the British to stay within the European Union could make the rate hike easier for the Federal Reserve. On the other hand, Brexit could cause the capital to flow to the assets that are considered safe. They include the dollar as well.
Both of these scenarios could be favorable for the dollar. However, the difference would be based on their scale, as well as pace. Brexit would cause the dollar index, measuring the value of the USD against the emerging markets currencies that are included in the US trade exchange, to increase by approximately 3% in a few days.
The largest changes that occurred were the ones against the pound. The British currency lost more than 10% against the USD, as well as reached its thirty-year minimum against the American currency. The emerging markets currencies have experiences this overvalue as well. The Polish zloty, the South African rand and the Mexican peso declined by approximately 5% each. On the other hand, the euro weakened by approximately 3%.
Larger nervousness of the global economy is not only shown by the behavior of currencies. There was a significant capital inflow on the treasury bonds. Moreover, the German stock market lost more than 10%, in just two days following Brexit. It was impossible to avoid loses for the American investors as well. S&P 500 (the basic index of the New York stock market) depreciated by more than 5% in two sessions following the referendum.
What next for the dollar?
A crucial element for the value of the American currency is the scale of possible economic disturbances caused by Brexit. For the time being, it seems that they may be rather serious. The worldwide GDP growth is relatively slow. There is uncertainty regarding condition of the Chinese economy, and the raw materials exporting countries are generating a lower global demand. Moreover, we currently have a matter of the UK leaving the EU, combined with a risk of complete disintegration of the United Kingdom, as well as the entire European Union.
The probability of the American currency further gaining value is determined by few elements. These elements are: extending negotiations regarding economic contacts between London and the EU, more talks regarding Scotland and Northern Ireland leaving the United Kingdom, and increasing anxieties of the market participants over bank sector, investments and consumption.
On the other hand, the dollar should weaken in the short-term, if the Brexit process is ceased and negotiations regarding the new trade contract between the UK and EU go surprisingly smooth. However, the Federal Reserve may yet again begin to suggest rate hikes, after seeing that the market situation has calmed down. This would be a positive signal for the dollar.
As a result, we may yet again see a consolidation of the American currency, regardless of the scenario. However, both of the above mentioned scenarios will differ with a pace of growth of the American currency's value. For the time being, it seems that the scale of the future growths may be significant. It is possible that the dollar may double its recent gains in the forthcoming weeks.
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