Political instability is often regarded by economists as a serious concern harmful to economic performance. For that reason, many foreign investors monitor the state of political affairs, as they often impact the strength of the US economy and the ability to service the national debt. The Government policies, without a doubt, have a great impact on the value of the US dollar. The points below elaborate political factors affecting the value of US dollar:
Budget Deficit and national debt
The US government budget can directly affect the dollar’s value. If foreign investors realize that the government spending exceeds the amount of money that it currently has, they can anticipate that the Government will be forced to borrow from future generations as well as from the private sector from foreign entities. To date, the US national debt stands at $26.95 trillion and is growing by over $1 billion per day.
Little or no default on debt
Whenever the government keeps a good credit history, risk falls down and the dollar rises up. Luckily, the US is currently considered the world’s most credit-worthy borrower, which largely explains why the dollar has remained strong and acknowledged as the world's reserve currency.
In times of stability, investors will flock to the dollar as it is known to be a safe bet. If investors believe that US policy is on the right track, they will want to put money in dollar-denominated investments, this increases demand and thus the value of the dollar. All of that demand on the dollar can cause shortages during times of economic crisis, but America’s central bank, the Federal Reserve, is responsible for issuing the currency and takes extra measures to prevent a squeeze when there’s a rush for the dollar bills. As an example, during coronavirus crises, it set up many ‘swap lines’ (agreements between central banks to exchange their country's currencies to one another) to ensure that there is enough money available for investment and spending. This helps stabilize currency markets when the demand for the U.S dollar increases.
Tax cuts for consumers
Usually, tax cuts for consumers used to boost the economy by putting more money into taxpayers’ pockets. Tax cuts may occur in different forms, such as cut taxes on income, profits, sales or assets. The cut can be a one-time rebate or a reduction in the overall rate. Normally, tax cuts for consumer’s increase spending, which in result improves the overall US economy. As long as it does not deepen the trade deficit or budget deficit, tax cuts can be good for the dollar
A political election can have a large impact on a country’s currency. This is because any election may inevitably entail political instability and uncertainty, which typically equates to greater volatility in the value of the country's currency. As an example, confidence in newly elected administrations can cause investors to flock to the dollar. Conversely, uncertainty may cause foreign investors to flee from the dollar, negatively affecting the dollar’s value.
By Adil Maidanov | 12 October 2020