Last month US President Joe Biden unveiled a huge stimulus package to help rebuild the country’s Economy in the wake of the COVID-19 pandemic. Worth $6tn, Biden’s big pledge appears to put the disadvantaged at clear priority – but some analysts remain sceptical of such unprecedented federal spending.

The US is one of many nations hit hard by COVID-19, suffering the largest Number of virus-related deaths and one of the deepest economic contractions. The health crisis has resulted in job losses, reduced spending, and reallocation of funds to help bolster healthcare and recovery. The US economy saw a significant decline in Q2 2020, but the country’s GDP had mostly recovered from the shock by the end of Q4, and since then the US has been on a path towards growth and expansion.

How has COVID-19 affected the strength of the US dollar?

Since the end of the Second World War, the US Dollar (USD) has consistently been seen as a safe harbour currency for investors due to the scale and influence of the US and the dominance of the US economy. It was therefore little surprise that when the world faced a new threat in the form of a contagious new virus that traders turned to the dollar and the currency crept up in value against the Euro (EUR).

Indeed, as the virus swept across the world in March 2020, the British Pound (GBP) collapsed to its lowest level against the dollar since 1985, dropping almost five per cent in a single day to $1.15 as the UK locked down. The pandemic had traders worried, with questions posted to trading communities like Asktraders beyond the normal queries about platform security such as “Is Tradeo safe?” and more focused on which currency is best placed to weather the coming financial storm.

How have vaccines impacted the markets?

The record-braking rapid development and roll out of a variety of vaccines around the globe have provided hope that the global economy may soon get back onto a path towards growth, with countries such as the US, UK, and Israel leading the way in terms of the percentage of their populations they have vaccinated.

The effectiveness in protecting people from the worst effects of COVID-19 are best demonstrated by the ongoing situation in the UK, where the number of virus cases is rising exponentially in a third wave, but hospitalisations and deaths are rising much more slowly. However, a fear that a resurgence of the virus could prove damaging to the UK economy has caused Sterling to tumble this month despite the health protections of vaccines.

What do economists think of Biden’s stimulus package?

It is clear that the US economy is still in need of support if it is going to regain the lost growth of last year, but analysts are divided on the size of the stimulus and the balance of risks associated with such a large infusion of government funds into the economy.

Some economists, such as Larry Summers and Olivier Blanchard, warn that the stimulus could cause the US economy to overheat, causing inflation to spiral upwards and forcing the Federal Reserve to tighten fiscal policy to intervene to avoid losing control. However, all predictions are based on a number of uncertain factors, with the scale of the intervention unprecedented in US history.

How long before the global economy recovers?

The fact that many of the world’s economies have already mostly recovered from the difficulties of lockdowns and healthcare crises in Q2 2020 may appear miraculous. However, whilst a number of sectors, such as live entertainment and travel, continue to struggle, others such as technology have posted some of their strongest growth figures for years, with many billionaires significantly increasing their fortunes over the last 18 months.

Nonetheless, many economies contracted by over 30 per cent in 2020, and so even with strong recoveries helped by unprecedented government intervention, it may still take a number of years before the lost growth is fully recovered.

The article What Biden’s budget means for the US dollar appeared first on Descrier.