Whilst the pound is the most obvious currency to be affected by Brexit, it is by no means the only currency. The Brexit Forex impact is broader than just the pound. The euro and the US dollar can also be negatively or positively impacted by Brexit and Brexit headlines. This was particularly clear on the 17th October 2019, when the EU and the UK agreed a new Brexit deal. The euro US dollar exchange rate rallied sharply on the announcement that the two sides had agreed a deal. Whilst this has been the clearest example it is by no means the only example of the euro advancing versus the dollar on optimistic Brexit headlines. Meanwhile negative headlines surrounding Brexit can drag the euro US dollar exchange rate lower.
What is important to euro investors and US dollar investors is whether the UK is able to achieve a Brexit deal or not and whether the UK Parliament then agrees to it. The UK leaving the EU without a deal, is quite a different scenario to the UK leaving the EU with a deal. Leaving with a deal means that there is a transition period within which businesses have time to adjust their operations. A no deal Brexit doesn’t have this transition period. From one day to the next there would be a cliff edge change.
What is the Brexit impact on the US?
Whilst some believe that the impact of Brexit is isolated to the UK and Europe at the most, this is not necessarily true. Looking at the US stock market tells a different story. The unexpected outcome of the June 2016 Brexit referendum shook up the financial markets across the globe. All the main US stock indices recorded losses of more than 3%. More recently, Brexit developments haven’t impacted the US financial markets in the same way.
Concerns surrounding Brexit are particularly associated with a no deal Brexit. As mentioned above, a no deal Brexit could lift the value of the dollar significantly versus the euro and the pound. In the case of an American producer selling to the UK or Europe, suddenly they face a barrier. This is because a stronger dollar means that their goods will become more expensive to buyers with pound or euros. Fewer sales can have a negative impact on the company, eventually resulting in a reduced labour force, higher unemployment and in a worst-case scenario an economic slowdown.
The other risk to consider is supply chain risk and the prospect of business interruptions. Every US company that has operations in the UK could experience significant disruption to the supply chain. This can be costly.
On the other hand, Brexit is a vote against globalisation. It removes the UK from the main international stage of the financial world. It creates uncertainty and this could be a plus for the US. As London lacks stability, New York could look like a more attractive alternative as the financial centre of the world. This would be a plus to the economy potentially compensating for some of the damage caused by the stronger dollar.
These are theoretical examples of the Brexit effect on US. The reality is that Brexit alone is unlikely to have a huge impact on the US economy. However, when added to other negative factors such as the ongoing US — China trade dispute, Brexit could serve to dampen sentiment further.
How does Brexit affect the dollar?
In order to assess the Brexit effect on the dollar it is useful to consider the changing value of the dollar since Brexit.
What’s the value of the dollar since Brexit?
In the aftermath of the Brexit referendum the dollar rose against a basket of currencies. The dollar also rose against the pound and the euro.
The value of the dollar against the pound in the weeks prior to the Brexit referendum was around US$1.46. The value of the dollar against the pound after was US$1.30.
The pound US dollar exchange rate dropped to a low of US$1.1650 on no deal Brexit fears in October 2016. The pair is back trading around $1.29 in October 2019 on hopes that the UK will leave with a deal.
The value of the dollar against the euro in the weeks prior to Brexit was around US$1.1470. The value of the dollar against the euro after the Brexit referendum was US$1.1060.
The euro US dollar exchange rate dropped to a low of US$1.03 in January 2017. The pair is back trading around $1.11.
So, why does the dollar increase when Brexit nerves increase?
Ever since the Bretton Woods conference, the US dollar has been considered the reserve currency of the world. This means that it is also viewed as a safe haven. According to Investopedia “a safe haven is an investment that is expected to retain or increase in value during times of turbulence”.For example, in times of elevated geopolitical risk, or broad risk off sentiment, investors look to buy into safe havens, such as the dollar.
The timing of Brexit has also boosted the demand for the safe haven dollar. Shortly after the Brexit referendum, Donald Trump became President and then there has been the ongoing US — Sino trade dispute. All factors which have raised market concerns over the stability of the global markets. As such, the dollar has rallied 10% versus a basket of currencies over the past 3 years.
When there are signs that the EU and the UK will have a peaceful orderly divorce, the dollar often falls as investors no longer feel the need for the dollar’s safe haven protection. When there are signs that the UK will experience a no deal Brexit and an acrimonious divorce from the EU, the dollar gets a boost as investors seek out its safe haven properties.
How does Brexit affect the euro?
Now let’s consider the Brexit effect on euro. This was noticeable in the aftermath of the Brexit referendum in 2016 when the euro declined versus the dollar. The Brexit effect on the euro exchange rate was also recently marked with the announcement of Boris Johnson’s new Brexit deal, which sent the euro higher versus the dollar.
As we discussed, when there has been good news surrounding Brexit and the likelihood of a Brexit deal has increased, the euro has increased versus the US dollar, but fallen versus the pound.
When there has been bad news regarding Brexit and the chances of a no deal Brexit have increased, it has not been uncommon to see the euro decrease in value versus the US dollar, but increase in value versus the pound.
Why is there a Brexit impact on the euro currency?
This is because the pound is the most heavily affected currency by Brexit developments. Therefore, the pound will experience the most volatility and the strongest moves in relation to Brexit. The euro often syncs the pound’s moves but in a less extreme manner.
This is because the type of Brexit will also impact on eurozone economies. A Brexit deal would reduce uncertainty and risk. This is beneficial for eurozone companies and economies. A no deal Brexit would elevate uncertainty and risk and would be damaging to eurozone economies.
For example, Germany, the largest economy in Europe and an exporter nation, is sitting on the brink of recession. Brexit has played a role in reducing German factory orders as business confidence falls. Jobs across Germany, France, Belgium and the Netherlands could be at risk as a no deal Brexit would almost certainly result in a hold up in trade and reduced trade. Falling confidence and slowing trade in the eurozone, an economy which is already experiencing a slowdown, could force the European Central Bank to ease monetary policy further in an attempt to shore up the weakening economy. A more dovish ECB could pull the euro lower.
On the other hand, a Brexit deal could return some certainty, boosting confidence. This could go some way to increasing trade and consumer confidence. Under this scenario the ECB may not be forced to ease policy as much, or at all, offering support to the euro.
What’s the value of the euro since Brexit?
The value of the euro against the US dollar has fluctuated since Brexit. The pair fell sharply in the months following the Brexit referendum to a low of $1.03 in January 2017. However, it is worth noting that this was not just Brexit. Other factors such as Trump’s tax cuts and lacklustre eurozone inflation also played a large role. So, is the euro going down? No, it rebounded, and the euro is once again trading around $1.11.
The euro and the US dollar are affected by Brexit developments. The euro, because a no deal Brexit would negatively impact eurozone economies. Meanwhile a Brexit deal could offer some certainty, reduce risk, lift business confidence and boost the euro.
The impact on the dollar is less noticeable but still exists, particularly following important headlines. The dollar tends to receive a boost when investors become nervous and look to the greenback for its safe haven properties.
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