However, the dollar's recovery in 2022 is far from certain due to global economic healing. Let's look deeper into this year's US dollar news and see where a USD estimate for 2022 could lead us. This article will help you decide whether to buy USDC or another cryptocurrency this year or invest in other traditional assets.
2022 USD forecast
USD struggled throughout 2020 and the first half of 2021.
However, with positive labor data and an expanding economy, several things could favorably affect a US dollar projection. However, the combination of economic depression and inflation concerns ensures that uncertainty persists. Let's take a glimpse at some of the determining elements.
The Federal Reserve and Monetary Policy
The Federal Reserve (Fed) has maintained a relatively loose monetary policy throughout the pandemic. However, the central bank has been forced to taper quantitative easing, with the November Consumer Price Index reporting a 6.2% increase (the highest inflation increase in more than 30 years).
Before delving into recent events, consider the monetary policy narrative of the last year.
During the worst pandemic, the US Federal Reserve reduced interest rates to a record low of 0% to 0.25%. It launched a quantitative easing program, purchasing $120 billion (£89 billion) in monthly bonds. The US dollar weakened in 2020 due to the Fed's ultra-easy monetary policies.
The Fed raised its growth forecast in early June, stating that two interest rate hikes were probable in 2023. It did not expect any rate hikes in 2023, instead anticipating the first increase in interest rates in 2024 at the initial meeting. As a result of the statement, markets rallied, with the US dollar seeing its most significant one-day gain since March 2020.
The Fed repeated in early August that while inflation remains low, interest rates would not be raised until 2023. Despite recent CPI statistics indicating the most significant inflation increases in decades, the Fed has since reversed its attitude.
In response to the inflation increase, Wells Fargo senior economist Sam Bullard stated that the supply disruptions and the recovery of services offer a considerable concern that higher-than-expected inflation may endure for longer than the Fed believes.
Moreover, he continued that they expect goods inflation to pass the baton to services over the next year. However, the supply chain constraints will continue to feed the flames of inflation in the short term.
The December Federal Reserve Update
The Fed stated on December 15th that while interest rate hikes would be delayed until labor market conditions "had reached levels sustained with the Committee's assessments of optimum employment," net asset purchases would be reduced by $20 billion for Treasury securities and $10 billion for agency mortgage-backed equities per month beginning in January.
Forecast for the US currency in 2022: Rising retail sales
According to the US Commerce Department, retail sales in the United States exceeded estimates in October. Inflation did not affect consumer spending in the United States, as sales increased by 1.7%, much beyond economists' expectations.
When comparing October to September, department store sales were up 2.2%, electronics sales increased 3.8%, and internet shop sales increased 4%. While these data provide solid evidence that the US economy is improving, it is crucial to highlight that higher levels of inflation skew sales figures.
Since inflation rose 0.9% in October, rising prices can account for roughly half of the increases.
Final thoughts
Despite ongoing uncertainties and continued volatility, there are numerous reasons to be optimistic about the US dollar.
The dollar's bullish feelings could last into the new year with a robust economic recovery pace, monetary tightening to address serious inflation issues, and solid employment figures.
What has happened?
The euro has fallen to the same value as the US Dollar, with 1 EUR being worth exactly 1 USD, according to many forex traders who have been keeping a close eye on the market. This is big news as this is the first time their values have been equal in 20 years.
Why has the euro lost value?
One of the main reasons that the euro has lost its value is the conflict in Ukraine. Russia, which invaded Ukraine at the end of February, is one of the main suppliers of gas to Europe. However, it’s thought that Russia will retaliate against western sanctions by completely cutting off the gas supply to Europe.
This uncertainty amid rumours that the 10-day scheduled shutdown of the Nord Stream 1 could be made permanent has contributed to the energy crisis in the UK.
What does this mean for Europe?
Unfortunately for us in Europe, it’s not good news. With many countries already on the cusp of a recession, the euro losing its value isn’t going to help the situation. The fall of the euro confirms the fact that current political situations and the energy crisis are going to have a knock-on effect on our bank accounts.
What does this mean for the pound?
Unfortunately, the pound is also unable to escape the dip in the European economy. So far, the pound has reached its lowest rate since March 2020, when the pandemic hit.
In practical terms, this means that imports such as food will become more expensive, pushing our monthly food bills upwards. We’ll also see an increase in commodities such as petrol. For those going abroad on holiday this summer, it’s not good news either. With a weaker pound, families will get less for their money when buying abroad.
What to expect next?
Although it may seem like a lot of doom and gloom, we haven’t entered into a recession yet. So, there’s always the potential that the times of hardship will pass, and the currency values will climb back up to their levels before conflict breaks out in Europe.
However, on the other end of the scale, there is also the possibility that the pound and euro will continue to fall, leading to a full-blown recession. On the other hand, the dollar has remained strong throughout, so it’s clear that the recession is just Europe-wide.
What will happen for certain? Only time will tell.
Western sanctions have frozen approximately half of Russia’s gold and foreign exchange reserves, which stood at around $640 billion prior to Moscow’s attack on Ukraine at the end of February.
The Bank of Russia said this move by the West, as well as discussions about a potential seizure of the frozen part of reserves, would prompt other central banks, such as those in the Middle East and Asia, to reconsider their savings strategies.
"One could expect an increase in demand for gold and a decline in the US dollar's and the euro's role as reserve assets," the Russian central bank said in a report on financial stability.
"One of the results of the imposed sanctions restrictions for the foreign exchange market was the tendency to increase the use of currencies alternative to the US dollar and the euro.”
The pound slumped as low as $1.3364, trading below a key $1.34 support level. The slump marks sterling's weakest point since December last year when the market was impacted by concerns of a no-deal Brexit.
According to data from the Office for National Statistics (ONS), the UK economy grew by 1.3% in the three months to the end of September, a figure which trails behind analyst forecasts of 1.5%.
Shortages of goods and labour had the most substantial impact on growth amid the struggle to meet the sharp rebound in demand. The biggest drivers were from the hospitality, arts and reactions, and health sectors as remaining Covid-19 restrictions were eased.
This comes following an initial tumble by the pound sterling last week, caused by the Bank of England surprising traders by leaving interest rates unchanged at record lows of 0.1% following a majority vote by the Monetary Policy Committee (MPC).
On the other hand, expectations that the Federal Reserve will raise interest rates faster than expected has seen the dollar boosted. This follows a 31-year high surge of US inflation.
In July, the European Central Bank (ECB) announced its plans to launch a digital currency. In response to a rise in online payments and the potential threat that could come from others issuing a digital means of payment, the ECB has decided to press ahead with its own digital currency. This aims to help protect its monetary sovereignty by attempting to limit the use of rival means of payment.
This will not be a quick process. The next two years will be spent on design and tests, followed by a launch three years later. However, the announcement highlights that traditional fiat currency won’t be the sole payments method in years to come. Of course, this move does not mean the same will happen for the UK, but with Rishi Sunak and the Bank of England making warm noises about digital currencies, it’s unlikely the UK won’t follow suit.
Will Digital Currencies Work as Cash Replacements?
Of course, there are many questions swirling around digital currencies – namely if they’ll be a digital version of cash, if they will eventually replace cash or just simplify cross-border payments – but the fact of the matter is cash appears to be becoming digital, meaning banks need to get ready, even if the day-to-day reality could be years away.
Taking a step back from this new development, it’s fair to say financial services was already in flux, with the pandemic turbo-charging many of these shifts. Previously, banks, building societies, pension providers and wealth management had defined roles within the market, and whilst there was some interaction between the providers, people had their pots of money and tended not to move them around. In short, loyalty mattered. But this, like many other aspects of financial services has now changed. New entrants are flooding the market and offering platforms that bring vendors together thanks to Open Banking enablement. Therefore, consumers are flooded with choice. It’s now simple to amalgamate pensions or to transfer ISAs to get a better rate. Plus, with digitalisation, self-service is now positively encouraged. One clear example being online brokerages disrupting the investment space and allowing consumers to own snippets of companies, instead of requiring payment for full shares. Consumers are used to a digital financial life – so why not extend this to currency?
The world is moving towards a more digitised way of life – and banking, payments, savings and investments are certainly part of this shift.
No matter where a company sits within financial services, it’s clear that if digital currencies become reality, firms will need to accept them, which throws up multiple issues. Integration with fiat currency is perhaps the most pressing. However, the growth of cryptocurrencies over the last five to ten years and their recent acceptance by large institutions, shows there’s a clear trend. Financial portfolios should no longer be cash, bonds or equities – a small exposure can be digital. For me, this coupled with the concept of digital Pounds, Euros, Dollars or Yen, signals it’s time for banks to start thinking at the very least what measures should be put in place to lay the foundations for adoption. Surely commercial entities could benefit from showing customers they’re ready to take action, and providing an alternative to investment platforms as a source and store of these assets?
But what’s required? Here are five key aspects which can help determine a starter strategy.
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System resilience
Like any fiat system, digital currencies would need to be considered critical national infrastructure – meaning uptime and defence are impenetrable 24/7, 365 days per year. Aside from this requirement, the new system would need to be protected from cyberattacks, whilst also handling high volumes of transactions. Systems should be able to process transactions immediately (or as instantaneously as possible) along with having strong privacy protections.
For banks looking to support and facilitate a lot of this traffic, leveraging blockchain seems the most logical choice, as the roles they will play in these transactions will be different to a normal transfer. Whilst money may well flow from one account to another, banks will also likely be responsible for updating the record of who owns which Central Bank Digital Currency (CBDC) balance. Of course, technicalities are still to be worked out as to how money will move around, but it’s likely the CBDC itself would be a cash-like claim on the central bank. This way, the central bank avoids the operational tasks of opening accounts and administering payments. Banks can continue to perform retail payment services, meaning there are no balance sheet concerns with private sector intermediaries. This in turn helps boost operational resilience, as this architecture allows the central bank to operate backup systems in case the private sector runs into technical outages.
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IT infrastructure
The potential introduction of digital currencies will be a testing experience for many – especially while we don’t know if it will come to fruition, or how it will work. Inevitably that will lead to a lot of speculation. One thing is for sure though, it may well require an overhaul of technology to integrate it, which will have repercussions for the IT stack. Unfortunately, technology to support such initiatives are likely to be considered ‘new’ to the majority of existing financial service organisations.
It’s well known that many banks struggle with legacy technology. They are not alone in that and big names across other industries have the same problem. The problem the banks have is that they’ll be the ones facilitating most of the transactions, whereas other players (retailers, for example) will mostly be receiving them. Whilst I don’t believe integration won’t be a problem for newer neobanks, they are in a far stronger position than their older rivals. Now is the time to get on the front foot and start thinking about what transformation will be required to help set the traditional banks on the right path. This includes safeguards which have been a criticism of cryptocurrencies – how to implement anti-money laundering protections, so the same due diligence a traditional banking service provides is applicable to its digital twin.
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Centralised vs decentralised finance
The whole concept of digital currency is an interesting one, based on the fact they add an element of decentralised finance to the country’s monetary policy. Of course, they will need to comply with current protocols, but they’ll also challenge how these protocols work.
To enable peer-to-peer transactions, digital currencies will need to make use of centralised governance frameworks that are authoritarian in nature — i.e., controlled by a single body. However, centralised blockchains are slower. Decentralised solutions like distributed ledger technology could make transactions quicker and more streamlined. To achieve widespread adoption, transaction speeds need to be efficient (much like an online bank transfer) otherwise consumers will not want to switch.
Decentralisation would also enable individuals to own their own wallets (akin to cryptocurrencies) and have their own private keys to help bolster security. This can help avoid data breaches and reduces risk. If a hack were to occur, it would stop one, single large fund being stolen – just a single person’s funds. Whilst this is a terrible scenario, it would be catastrophic if one pot were accessed. It would undermine any faith in the system.
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Payments
Simplifying cross border payments could provide benefits in terms of e-commerce, travel and the labour market. However, it will have significant requirements, such as aligning regulatory, supervisory and oversight frameworks, AML/CFT consistency, PvP adoption and payment system access. The eventual international adoption of digital currencies is also likely to proceed at different speeds in different jurisdictions, calling for interoperability with legacy payment arrangements. Whilst this sort of information will likely come from G20 discussions, banks need to start addressing how to facilitate this and how this can be achieved within the current stack.
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Consumer adoption
Whilst not a technical point, banks will likely share responsibility with the Bank of England in communicating the launch of any digital currency and how it will work. Provision and service is a key differentiation. We also need to acknowledge that the recent volatility in cryptocurrencies may make consumers wary of adopting digital currencies, which impacts their adoption. Being able to clearly communicate how digital currencies will integrate with current offerings and the benefits of this early, will help with customer uptake and acquisition.
Although the adoption is still conceptual, thinking about potential customer provision and how it might be integrated into current platformification/product offerings can help with service design and ultimately, user experience.
The world is moving towards a more digitised way of life – and banking, payments, savings and investments are certainly part of this shift. Financial institutions have had to manage this evolution already, so in some ways, a digital currency is a logical next step. For it to survive, however, the necessary infrastructure must be present for it to thrive, which banks can provide if they put the necessary building blocks in place now. The change will not happen overnight, or potentially in the next five years, but to win the hearts and minds of customers, provision will need to be seamless – placing customers at the heart.
The value of the pound sank precipitously on Friday, falling by more than 1% against the euro and the dollar after UK prime minister Boris Johnson’s warning on Thursday that a no-deal Brexit remained a “strong possibility”.
Sterling fell 1.3% against the euro to €1.089 and against the dollar to $1.3204 in early London trading.
The pound has been under continuous pressure since Wednesday, when Johnson and European Commission president Ursula von der Leyen confirmed that “significant differences” were yet to be bridged after trade negotiations in Brussels.
The UK and EU are currently deadlocked over questions of their post-Brexit relationship, with main sticking points including competition rules and fishing rights in UK waters. The two sides have set a deadline of Sunday to reach an agreement and prevent a “no-deal” scenario that would likely cause economic chaos.
"We need to be very, very clear there's now a strong possibility that we will have a solution that's much more like an Australian relationship with the EU, than a Canadian relationship with the EU," Johnson said. Unlike Canada, Australia does not have a comprehensive trade deal with the EU, and most of its trade is subject to tariffs.
However, the UK as a nation conducts far more trade with the EU – around 47% of its overall trade compared with Australia’s 15%.
“With the UK now looking like it’s hurtling towards a no-deal Brexit, investors should adopt the brace position for swings in sterling and shares in domestic focused companies,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
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Whether or not a deal is achieved, the UK’s temporary trade arrangements with the EU will expire on 31 December.
This is the question Betway Insider asked 2,000 Brits, to reveal what the nation would spend a million on.
Despite claims that £1 million isn't enough to retire on, our research found 50% of Brits would leave their jobs today, with men being more likely to leave work than women.
Betway also took the question internationally and found in the US, just 36% would stop working, with 41% of mainland Europeans also packing up their desks.
When it comes to making money, the research found something surprising; Generation Z (18-24) are most likely to start a business with their million - a choice more popular than buying a holiday or paying off debts.
In recent news the world witnessed Venezuela’s turmoiled path to hyperinflation. According to a recent report by the International Monetary Fund, Venezuelan citizens have been experiencing price hikes on consumer items of 200% week to week, and that’s just things like coffee and bread.
Behind the cause of Venezuela’s inflation is rumoured to be corrupt politics, price-fixing and social unrest, but much of the capital crisis began with rising prices of raw materials and a large reliance on imports for day to day living. Since 2015, an estimated 1.6 million people have left the country making themselves economic refugees elsewhere.
However, before we can understand how Venezuela, once a country with one of the strongest economies in South America, came to bust a 3-month annualized inflation rate of over 1,200,000%, we should learn about inflation and how it works.
Inflation is often considered the pinnacle of modern economics, but it’s not just a modern phenomenon. It goes way back, and has impacted exchanges, banking and commerce for hundreds of years. Today, inflation primarily influences interest rates, including but not limited to mortgages, pensions, payments, accounts, and all in all, the price of goods and services. On the back of all these, inflation also impacts investors.
In fact, inflation could be described simply put as the rate at which the price of things increases. The opposite is deflation, the rate at which the price of things decreases.
Inflation is usually measured and discussed according to two systems: The Consumer Prices Index (CPI) and the Retail Prices Index (RPI). These change according to data on how much stuff costs, how much people spend and how much something is valued, over time. The percentage figure shown by the measured CPI, i.e. 1.5%, means that goods and services are costing 1.5% more than the previous year. In theory, CPI should fluctuate according to supply and demand and therefore inflation occurs quite naturally in most countries, like the US and the UK, while in countries like Venezuela, the equation is littered with impacting factors that are difficult to even make sense of.
CPI figures in the UK are measured up to at least three decimal places and reported rounded up to a single decimal place. In Venezuela, they are far from reporting CPI in decimal round-ups, and perhaps they may never again. Once the fast-paced acceleration towards hyperinflation occurs, it’s very difficult to come back. Two famous examples of similar hyperinflation that have occurred are 1920s Germany and 2008 Zimbabwe, and in the latter case the solution was a complete overhaul of the African nation’s currency and dollarization of its economy.
The natural turnaround of inflation is that when the prices of items increase, the value of the currency buying the items decreases. For example, if I bought a cup of coffee for £1.50 last year, and this year it cost me £1.55, then for the same cup of coffee, I’ve had to spend more money, which on the flip side means my money is worth less; it’s worth less cups of coffee.
This video explains it well.
If we take a look at the changing prices of a cup of coffee in the UK compared with Venezuela, over the last four or so years, it may look something like this:
Since Venezuela's established position as a leading economy in South America, it has come a long way in doing bad trade. Prices of daily used items and household groceries have been coupling MoM. The main reasons behind this are a, shortages in state manufactured and produced goods, and b, a shortage of imported goods due to poor international relations. Within this equation is oil, which forms a majority stake in Venezuela’s export economy and a greater part of its GDP, given that Venezuela is home to some of the biggest oil reserves in the world. A slowdown in oil production since Maduro’s government came to power, mainly due to a lack of historical investment in the sector compared with the rest of the world’s oil markets, consequently resulted in a 45% reduction in GDP since 2013.
Pre-2013, Chavez was in power, and managed to keep the country’s economy afloat via oil revenues, but when he died of cancer in 2013, Maduro came to power and when global oil prices crashed, he failed to maintain stability. He ordered money to be printed to pay employees and continued to dispense state welfare. He then proceeded to control the price of household groceries, like flour, eggs and cooking oil. As CPI figures increased, the value of the Bolivar decreased, making foreign imports even harder. These events, combined with a collapse of import trade, led to the current hyperinflation that exists today. Further scarcities in food and medicine have also created hostile local environments, with protests and riots taking place across the country.
At this point, having depleted the state’s foreign exchange reserves, nation’s like Russia and China are no longer willing to help. Venezuela also cut off ties with the IMF in 2007, and the chances of a current bailout are slim. Although reports indicate Venezuela is on route to hit the 1 million percent inflation mark this year, according to the BBC, Venezuelan officials plan to resolve the country’s current economic anguish with very unorthodox methods. Nicolas Maduro’s government introduced a new digital currency, launching an Initial Coin Offering (ICO) for Petro this year. Serious doubt surround this move, as it is widely agreed the Petro is simply smoke and mirrors, with no real value. On the other hand, the government claims it raised $735m with the ICO, mostly backed by oil. The aim is to circumvent US and other countries’ economic sanctions, originally put in place due to political squabbles, and open the country up to international investment. They also intend to turn things around by introducing urban chicken and rabbit farming…
Sources: https://nationalpost.com/news/world/an-estimated-1-6-million-people-have-fled-venezuela-since-2015-thats-five-per-cent-of-its-population https://www.finance-monthly.com/2018/03/the-pound-vs-inflation-and-how-this-impacts-investors-today/ https://www.forbes.com/sites/garthfriesen/2018/08/07/the-path-to-hyperinflation-what-happened-to-venezuela/#6b96ff9915e4 https://www.bbc.co.uk/news/uk-45652921 https://www.bbc.co.uk/news/business-12196322 https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic https://www.forbes.com/sites/stevehanke/2017/10/28/zimbabwe-hyperinflates-again-entering-the-record-books-for-a-second-time-in-less-than-a-decade/#776634f03eed https://www.livemint.com/Opinion/7gNrvecy9QlyFrJYmZfiiL/The-how-and-why-of-the-Venezuelan-crisis.html
Towards the end of July the price of gold steadied after US President Donald Trump who criticized the Federal Reserve's interest rate tightening policy. In more recent events, Trump doubled tariffs on Turkey’s steel and aluminium.
In the US gold prices have hit a 17-month low, falling down to the $1,200 mark and are increasingly trading lower. In other countries the price of gold continues to rise.
Daniel Marburger, Managing Director at Coininvest told Finance Monthly: “Gold prices soar in times of uncertainty, which is why many people expected gold price to fall once Trump was elected.
“Throughout his presidency, Trump has proved to be a controversial character and we’ve seen movement in gold price reflect this.
“He has had a positive impact on the value of the US dollar which usually lowers the gold price, however, current trade wars Trump has started with the EU, Canada and China are offsetting this, slowing the decline.
“High interest rates make gold a less attractive investment, unlike other investments it doesn’t offer interest. It will be interesting to see how the US president’s decisions will impact the value of gold throughout the rest of his presidency – especially as we approach the mid-term elections in November.”
Business Insider spoke with Dharshini David, economist, broadcaster, and author of "The Almighty Dollar." David talked about why the Euro hasn't challenged the Dollar as an international currency, despite being used by more people than the American currency. She also talked about how the Yuan could become the world's dominant currency.
Discussing the latest on stock markets, currencies and the news that Carillion will be heading into liquidation, Rebecca O’Keeffe, Head of Investment at interactive investor talks to Finance Monthly below.
The strength of sterling and the euro are seeing European stock markets fall slightly, as currency gains cap equity valuations. Sterling has been riding high both on the basis of a weaker US dollar and expectations of a softer Brexit than previously forecast. These currency moves are having a mixed effect on big corporates in the UK, where dollar weakness has given commodity prices a further boost with the big miners benefiting, while other big global companies are falling on the basis of lower dollar profits when converted back into sterling.
The government’s decision to walk away from Carillion appears to be based on optics rather than logic and looks like the wrong decision was made for the wrong reasons. There is no doubt that Carillion posed a huge political challenge for the government, which did not want to be seen to bail out another group of private shareholders and banks after suffering such a backlash from their decisions during the financial crisis. However, the prospect of the government temporarily funding existing Carillion public service contracts, alongside the likely increase in costs for renegotiating contracts with new suppliers, make it highly likely that they could ultimately pay far more than if they had provided the guarantees that Carillion’s creditors needed. It is far from clear at this stage what the wider implications will be from the liquidation of Carillion, both in terms of its impact on the construction industry and on the wider economy as a whole, not least from the enormous uncertainty that now afflicts the tens of thousands of Carillion staff and those other companies directly dependent upon it.
