Currency is central to international relations. Exchange rates determine how economies are stacked against each other and allow international public and private business. In the post-pandemic world and world economy, many are struggling to recover from lockdowns and slow business. In addition, the war against Ukraine has limited gas and energy access. All of this contributes to a new trend, where the US Dollar is once again leading the world while the Euro and British Pound have fallen behind. While strength abroad ensures American relevance and economic stability, it comes with consequences for ordinary domestic consumers.
International exchange rates are fluid and have been since Nixon took the dollar off of the gold standard 50 years ago. Previously, the standard price of gold could easily convert between currencies. While there was some fluctuation then, it was more mild and controlled. Since then, exchange rates are subject to the international economy. Essentially, one currency is traded or exchanged to the other subject to the opinion of traders. Currently, other nations and international corporations view the US economy as stable and reliable, or at least more so than the European or British market. This makes the US dollar powerful, and puts the US in a place of economic bargaining power.
Ever since the World Wars, America’s dominance in international trade and investment has made the dollar a common unit of exchange. Through recessions in the 1980s and again in 2007-2008, the value of the American dollar has fluctuated. In November 2022, The British pound was at a 20-year low compared to the dollar, calling back to the economic effects of 9/11. Among the causes for this dip are Brexit and financial divorce from the EU, economic fallout from the COVID-19 pandemic and quarantine, and now the Ukraine-Russia war. This makes American goods more expensive for British consumers, which hurts foreign sales for American companies. This also makes British goods less expensive for American consumers.
This story is repeated throughout Europe and even into East Asia. The Euro is also experiencing a two-decade low. All of Europe is suffering from lack of gas and energy from the East because of the war in Ukraine. While America is supporting Ukraine and maintains strong trade with partners in Europe, America’s friends are facing a difficult winter financially and otherwise. This leaves American allies vulnerable. The UK is going through political change with a new monarch and Prime Minister. A difficult winter without enough gas or energy leaves France and Germany open to more extreme political swings. The extreme right has been building momentum in both countries and this could be an opportunity for them to gain more power. The difficulty of the winter because of rationed energy access coupled with right wing extreme groups could lead to allies with governments less friendly to the US in the next election cycle.
While several major world economies are currently suffering and contracting, the World Bank is not yet predicting recession. While some of this hedging may be to prevent panic, there is some evidence they are still waiting to see. The two events that accurately predict the oncoming recession are first: a slowdown of growth in the previous year and second: several major economies in slowdowns or recessions. The World Bank claims that neither of these criteria have been met yet, although they could be in the near future. Yet 2020 saw a shrink in the global GDP by more than 3% and major European economies are struggling with slowdown, as well as Russia, China and Japan. The US economy is showing some signs of slowdown. The job market has not shrunk, although profit margins have. The strength of the dollar abroad is merely a symptom of the US and other economic slowdowns. The US economy is just slowing less than others.
Altogether, the present threat to US security is weakened neighbors abroad and unhappy citizens at home. Allies and friends abroad will need financial support, which may come in terms of favorable trade policies, to maintain the peace and survive the winter. Citizens at home in the US are seeing the interest rate increase every month while prices are also increasing, making it more and more difficult especially for young adults to finish an education, buy a house, or start families. The financial reserve already is acting on a plan to prevent a recession that seems to be already looming.
The future threat of national or global recession is perhaps more frightening. The International Monetary Fund pins the reason for the coming recession on the cost of living crisis. An optimistic hope for the end of the recession is restoring price stability and alleviating cost of living pressures. This applies to both the American economy and the global economy. The countermeasures to take to alleviate the severity and duration of the recession are exactly what the US and Europe are doing, with increasing interest rates and rationing energy to survive the months ahead. Crash is perhaps inevitable in Russia, but the rest of the world is trying to prepare for the coming crisis and heeding the warning signs now with slow GDP growth and the change in currency value.