Leaving the European Union has resulted in much concern among investors about both the fate of Britain’s and the EU’s economies. In addition, the process of exiting the EU is expected to take at least two years, which brings further uncertainty to how the situation may influence the global economy and currency markets. Thus far, about a month after the June 23, 2016 Brexit decision, the British pound, euro and Chinese yuan have depreciated, while the U.S. dollar has strengthened, making travel more affordable for American citizens.
Bull Market in the U.S. Dollar
Brexit has had the effect of further strengthening an already robust greenback as investors begin to park their capital in low-risk assets. The U.S. dollar index (NYBOT: USDX) is a measure of the dollar’s value relative to a basket of currencies consisting of the United States' six most important trading partners: Sweden, Switzerland, the European Union, Japan, Britain and Canada. Within this basket, the euro holds the most weight at 58%, followed by the yen at 14%. Since bottoming out in May 2011 at 72.7, the USD has entered into a bull market that took off in 2014 before peaking at 100.51 in December 2015, resulting in a gain of 38%. Considering that the U.S. dollar is the world’s primary reserve currency, the strength in the greenback has had the effect of depreciating the value of many other currencies around the world, most notably the euro and Chinese yuan, in addition to the British pound.
A Falling British Pound
Over the past two years of the dollar’s bull market, the British pound-to-USD ratio (GBP/USD) has plunged 24.6% from peak to trough. As of July 18, the GBP/USD had fallen 10% from 1.474 to 1.326, year-to-date (YTD), making the pound the most depreciated currency this year. While a countless number of factors go into the market pricing of currencies, the result of the Brexit decision is widely regarded as the most significant. After the vote to leave the EU, the pound fell 11% to a 31-year low.
Value of the Euro Depreciating
Furthermore, the euro has also faced significant backlash following the Brexit vote, dropping 3.4% from 1.138 to a low of 1.099 on June 27. The EUR/USD exchange rate has already been under pressure since 2011, when the EU started to ramp up its quantitative easing program. From its April 2011 peak of 1.481 to its March 2015 trough of 1.049, the EUR/USD dropped 29%. The recent move by Britain adds fuel to the euro’s bear market as investors’ concerns about the stability of the EU and the eurozone mount. As a result, the president of the European Council, Donald Tusk, is making a sincere effort to calm worries surrounding the unity of the remaining 27 member nations.
Devaluing the Chinese Yuan
Outside of the European continent, the U.K.’s decision to leave the EU has aided the depreciation of the world’s second-largest economy’s currency, the Chinese yuan renminbi (CNY). After the People’s Bank of China (PBOC) reduced its foreign-exchange reserves from $3.56 trillion to $93.9 billion in August 2015, the CNY/USD dropped 5.6% over the course of 10 months, averaging a 0.56% decline per month. However, over the course of July 2016, the month following the Brexit vote, the CNY/USD has already hit a five-year low of 0.149, a 2% drop since Britain’s decision. As the value of the dollar has gained following Brexit, China and Asia economist for the Bank of America Corporation (NYSE: BAC) Helen Qiao believes that the PBOC might be forced to allow quicker depreciation of the CNY/USD to maintain competitiveness within the export industry.
Traveling Abroad
While a relatively strong dollar hurts international trade, it significantly lowers the cost of traveling abroad for U.S. citizens. Compared to two years ago, the dollar now goes 8%, 18% and 22% farther in China, the EU and Britain, respectively. There is hope that this considerable cost savings could spur Americans to travel abroad, boosting tourism internationally.
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