In recent months, British and US troops have left Afghanistan, and after 20 years of involvement and army presence, the military campaign in the country came to an end. With criticism surrounding the way in which America withdrew, how does this fare for the strength of the US dollar (USD)?
As investors partaking in foreign exchange (forex) trading will be analyzing the impact on the dollar, both instantly as well as over the coming years, let’s explore if these dramatic events have tarnished the value of the USD.
The Collapse of Afghanistan
The fragility of the Afghan government and its armed forces seemed unpredictable, as the Taliban was able to seize control of the country with more speed than initially thought. The assessment of Western delegates implied a steadying of the security situation over the following year, especially in Kabul. But its fall happened almost instantaneously, during mid-August.
It is however expected that the Taliban will shortly be announcing the new government, at our time of writing, which will outline to foreign leaders how to adapt and deal with a new Taliban administration. The future negotiations between international leaders are something to monitor, as could influence the economic health of the countries involved.
Biden’s defense of withdrawal
In response to the US decisions, President Biden was defensive and rejected the criticism of the withdrawal. He explained that it would cost more for the US to remain in a civil war, and the alternative to the withdrawal was a further escalated war. The removal of troops from Afghanistan was a central part of the president’s campaign, and it is believed that the American public will favor Biden for following through with that promise.
As a result of these events, Biden explained in a press conference that his administration’s future strategy will be guided by military technology and cybersecurity, rather than deploying large troops to foreign countries. It is also implied that the foreign policy will be guided by economic competition with China and Russia.
Investors will therefore be keen to see if the current US administration will commit to stronger allies in Europe and Asia. If this is to be the case, then the Japanese yen is a currency to consider, which saw some gains against the dollar during these turbulent times, at the time of writing.
In terms of the US and the value of relevant assets, it is the extent of the link between a small economic country and the way in which the US withdrew that will guide the currency’s worth. These events have given evidence of the direction of the US administration and the nation’s power across the world.
It begs the question of whether USD will continue to be deemed the base currency of the world, or whether other powerful country’s currency will dominate. However, if past wars and crises are to go by, the USD is likely to still recover and remain as the primary asset in the world’s financial system.
Despite the geopolitical shock, the events that took place seemed to have a little initial impact on the market and the strength of the dollar, and other incidents, such as the Delta variant of COVID-19 and tensions in China, swayed the movement in the foreign exchange.
For long-term strategists, the role of the US and its actions towards Afghanistan highlights further its strength, or lack off, as a powerful nation compared to China. It could be that the might of China will increase as a result, which could mean a stronger position for its domestic currency. The Chinese renminbi could therefore be an important currency in years to come, although there would be some elements of risk, with China’s less regulatory political environment. However, with future periods of geopolitical uncertainty and the likely event of further crises, it is not easy to predict the next best ‘safe’ currency to invest in.