Most of what we hear about on the news tends to be negative. And, given that the US and US news corporations have the loudest voice online, much of the negativity is directed inwards at the US itself. If it’s not Peter Schiff predicting each year that the next big crash is just around the corner, it’s that the USD will crash, over-inflate, and become outcompeted by gold or crypto.
If we take some respite from the fear-mongering, it’s evident that the US is actually in a very strong position. In a world of crippling currency debasement, war, and an energy crisis, the US is less impacted by these. For example, the US is energy independent and the Fed has been getting to work on offsetting inflation with rising interest rates. As a result, the USD is the strongest it has been in nearly two decades.
When 1 USD can now buy GBP £0.95 or EUR €1.04, as opposed to £0.73 or EUR €0.85 this time last year respectively, it’s time to get spending. Besides simply importing more British or German cars, Americans have been looking to invest their money in overseas markets whilst the dollar is so strong. Given that rising property prices are crippling most European countries right now, overseas real estate seems to make the most sense.
Overseas real estate
Europe, Canada, and Singapore have all experienced an influx of real estate investment from Americans in the first half of 2022. Given that the dollar has continued to strengthen, we can predict that the second half of 2022 will see similarly high levels of outward spending.
This also has implications in the remittance and money transfer market, as international payments with US dollars is also booming. With exchange rate markups and wire fees becoming more competitive, obstacles for overseas investments continue to erode. Clearly, though, the US dollar is being bought more than it’s being sold as investors see it as the safest fiat to hold right now – but more on that later.
Whilst most Europeans are constantly feeling like it’s more expensive to buy a home today than it was yesterday, the opposite is true for Americans. This is creating a perverse behaviour, in which despite property skyrocketing in price, it’s becoming more attractive to Americans. Of course, this makes the issue worse for Europeans, as demand for the often short-supplied housing market gets pumped up.
Though, they only have themselves to blame in many cases. The UK’s way to tackle rising property prices, for example, has been to make it easier for first-time buyers to borrow money and buy a home. Which, very obviously, is making the problem worse as it increases demand but not supply.
A Euro in danger could pose a threat to Americans
Clearly, the cheaper Euro has only benefited Americans buying a home in Rome or Bern. But, what if the trend continues? If the USD continues to strengthen against the Euro, it could pose a threat to Americans holding assets in Euros who may want to exchange back to dollars at a later date.
Whilst we cannot predict the future of currencies, there is a very real existential threat to the Euro right now. Many of the Mediterranean nations are facing a debt crisis, making it difficult for the European Central Bank to properly raise interest rates (which could help increase the value of the Euro and fight inflation). Of course, the only thing worse than the ECB not raising rates in accordance with the Fed is to raise them and force Spain and Italy to default on their debt.
Many claim the EU should form a fiscal union, because sharing a monetary system but not a fiscal one creates some strange and difficult dynamics. But regardless of the politics, American investors buying up homes in Italy face this double-edged sword: a country in danger of defaulting or a falling Euro. If the Fed continues to increase rates, the latter seems certain. Though, with the far-right on the verge of winning an election, political instability could also be another danger.
It seems odd to think of the US as a beacon of political, geopolitical, and economic stability, but this is seemingly the case right now. Perhaps this is worth considering for the Americans who are rushing to swap their USD and American assets for more European allocation.