How is the weak US dollar affecting global money transfers?
- Published: 27th November 2020
The US dollar is headed for another monthly decline as appetite for the currency wanes. The dollar index has fallen by more than 1.20% in November and by more than 10% since its peak in March. As of this writing, the currency is trading at the lowest level since September.
Dollar vs other currencies
The US dollar has weakened against most currencies, including those from the emerging and developing countries. For example, it has weakened by more than 8.8% against the euro in the past six months. In the same period, it has fallen by more than 7% and 10% against the euro and the Norwegian krona.
The same trend is has happened when you look at emerging market currencies. The dollar has lost more than 10% against the South African rand and the Mexican peso.
Perhaps, the only major currency that the greenback has strengthened against with has been the Turkish lira. The lira has fallen by about 13% mostly because of the influence of the president on the central bank. But, in the past few weeks, the lira has gained by about 8.50% against the dollar.
A stronger greenback has a substantial impact on money transfers because of its dominance in the industry. For recipients, it means that they are receiving more money. For example, if the Turkish lira is trading at 7.83 against the dollar, it means that the recipient receives TRY 783 if a person sends them $100. On the other hand, if the lira is trading at 6, they would receive TRY 600.
Why the USD has weakened
There are three primary reasons why the USD has weakened against its peer currencies. First, the recent announcement of a Covid vaccine has led to reduced risks in the market. That’s because with a vaccine, life will possibly get back to normal in the next few months. As a result, risk-on investors have embraced other currencies and abandoned the dollar.
Second, the recent election in the United States has also led to lower risks. For one, unlike Donald Trump, Joe Biden is seen as a consensus-builder and a diplomat. As such, he will likely improve America’s relationship with other countries and not engage in trade wars. Trade wars and poor international relations are usually better for the USD.
Finally, the decision by the Fed to print unlimited amount of money has also led many investors to move away from the dollar.
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Crispus Nyaga is a full-time financial analyst and trader with more than 7 years in the industry. He has been fortunate to work for several fintech companies, mostly from Europe, Asia, and North America. His work is published in leading platforms like Seeking Alpha, Invezz, InvestingCube, Capital.com, and Marketwatch. Crispus operates from a private office in Nairobi.