US dollar: between safe-haven currency and political uncertainty

The US dollar lost significant value last year – not due to economic fundamentals but because of growing political uncertainty. While weak currencies can offer exporters short-term advantages, a further erosion of trust carries risks. Our simulations indicate that a further global dollar depreciation of 15 percent would weigh on GDP growth in both the US and the euro area. At worst, GDP growth losses could range between 0.3 and 0.4 percentage points. It would also put the US at risk of a renewed sharp increase in inflation. Therefore, the US is unlikely to have an economic or political interest in a further rapid dollar depreciation. In contrast, theoretical estimates and models foresee the euro strengthening significantly against the US dollar over the medium term.

US dollar: between safe-haven currency and political uncertainty(PDF, 262 KB, accessible)