USD is historically considered one of the most stable currencies. Investors turn to it both in good times and bad, driving up its value in both instances. This is sometimes referred to as the dollar smile – which might become crooked in the near future. In turn, this would affect the exchange rates of EUR and HUF as well.
The dollar smile in a nutshell
The dollar smile refers to the smiling curve in a chart showing how USD historically performs in different scenarios. In the first corner of the “mouth”, USD is strong in a globally difficult environment because investment flees to safer pastures (to USD). When the global economic environment starts to improve and seems to perform better than the U.S., investors remove from USD and it loses from its value, which gives us the lover curve of the smile. However, when the U.S. starts to outperform their global competitors again in an overall favorable environment, USD becomes more attractive again, making up the other corner of the “mouth” on the chart.
Recent developments might make the smile crooked
Currently, there is a possibility that the throne of USD might topple in the near future, taking other currencies with it if it falls. This imbalance is a result of the trend of keeping an inordinate amount of investments in USD over the last years and the tariffs introduced (and in some cases, revoked) by the U.S. administration.
Over the last several years, Asian exporters amassed a sizable surplus in their trade balance against the U.S. They accumulated a huge mass of USD, alongside other Asian investors. It is estimated that they own USD 2,500 billion. Now the latest turns in U.S. politics started to destabilize USD, which poses an enormous risk to those who have USD as the bulk of their investment portfolio. If investors start to panic sell, that can launch an avalanche that could seriously damage the value of USD, and sweep other currencies off their feet. What makes things worse is that the position of countries with the largest trade surplus, such as China, Taiwan, Malaysia and Vietnam, is probably unsecured.
Asian and European exchange rates this month
The other week, the Taiwan Dollar (TWD) saw an unprecedented surge. Several other Asian currencies saw a significant growth too. These currencies are usually considered emerging currencies, and as such, they belong in the same group as many of the Central European currencies. While European currencies have strengthened compared to USD since the start of the year, they have not yet followed the movements seen in Asia. It is difficult to anticipate how the EU market will react if the Asian exchange market becomes more turbulent.
For Hungary, the effects on EUR will be the most important aspect of the future developments.
Waiting for developments
Now everyone is waiting for new developments in the trade war between the U.S. and Asia. If it continues for long and Asian countries allow their currencies to strengthen further compared to USD, that will lead to further USD devaluation. However, Asian policy makers are trying to negotiate with the U.S. to avoid the enormous tariffs currently in place. EU policy makers are trying to advance negotiations too.
Reliable ally in Hungary
Even in an uncertain environment, your best bet is to work with providers you can rely on. Helpers Finance provides dependable accounting and bookkeeping services, complete with payroll administration and HR support. We work mostly with foreign owners of small and medium-sized businesses in Hungary, offering assistance tailored to your specific needs. You can always turn to us with your questions, and we will always do our best to provide solutions tailored to your needs.
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