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USD actually increased during the last recession

Are we headed for the next recession? It depends on who you ask.

The USD grew 22% against the Euro in late 2008
The USD grew 22% against the Euro in late 2008

Are we headed for the next recession? It depends on who you ask. As the US enjoys an extended period of growth, economists and financial strategists spent the last year predicting the next downturn with varying degrees of certainty. It’s not altogether that surprising since the wounds of 2008’s great recessions still linger – the stock market and sector bounced back but lower income groups and millennials were less lucky. Today, the long running trade war between the US and China is also causing ripple effects across the globe, particularly in the manufacturing sector which continues to struggle with the uncertainty and tariffs. Recessions, albeit less dramatic than the financial crisis over 10 years ago, are regular occurrences in the US and Canada so a future downturn is likely inevitable.

Whenever it occurs, the next recession could impact countless parts of the economy including the stock market, jobs and countless other factors. The Great Recession led to a doubled unemployment rate and a $19 trillion loss in the net worth of American households due to the stock market plunge. But what happened to currencies? Historically, currencies have reacted in different and unpredictable ways during periods of economic decline. The British Pound reached a 31-year low during the recession, with a value of $1.40 to the USD in early 2009 compared with $2.11 in November 2007. The Canadian dollar went from hovering around par with the dollar to dropping by about 20% within the year. Similar scenarios were experienced by many countries, yet the USD actually increased during this time.

In fact, it grew 22% against the Euro in late 2008. The trajectory was surprising considering the US was at the centre of the recession and other areas suffered greatly. Looking back, there were a few key reasons. The USD has long been the world’s reserve currency and along with a few other stable currencies, is considered an economic safe haven with the combination of low risk and high liquidity. In previous recessions, like the market crash of 1987, investors greatly favoured the USD and sold foreign equities in droves. This same action was echoed over 20 years later as many sought US Treasury securities. In fact, there was actually a shortage of USD during this time which led to a dollar appreciation. Lastly as high-risk assets like certain equities plummeted in value they were bought internationally, further bolstering the USD.

Does this mean that the dollar will increase with every recession? Likely, not. Though some economists have found instances of USD growth during downturns, there’s no direct correlation or guarantee. In fact, the multitude of factors that led to the last recession increase only show the unintended consequences of financial actions.