What will happen to the US economy when the exchange rate suddenly plummets?

The new report showed that nonfarm payrolls increased by 114,000 in July, the lowest monthly increase since April 2024 and significantly below the 175,000 expected by the market. In just two days, the dollar has dropped by 1500 basis points. Recently, the volatility of  dollar index has increased, the depreciation trend of , and the concern about the outlook of US economy is reflected in the market.

 A number of factors have put the U.S. economy under pressure,  including investment and debt overhang caused by rising asset prices,  and debt risk caused by falling investment yields.  In addition,  turmoil in US financial markets has intensified and  a number of macroeconomic data have deteriorated. First of all, when the economic data of the United States, such as GDP growth rate, employment data, inflation data, etc., perform poorly or are lower than market expectations, the market will worry about the future growth prospects of the United States economy, and then trigger capital outflow, resulting in the decline of the dollar exchange rate. Monetary policy changes by the Federal Reserve can also have an important impact on exchange rates. For example, if the market expects the Fed to cut interest rates, then the value of the dollar will fall relative to other currencies because cutting interest rates makes the dollar less attractive. Geopolitical tensions or emergencies can also lead to changes in capital flows, which in turn can affect exchange rates. The decline in the dollar exchange rate will make the price of US exports relatively lower in the international market, thus improving the competitiveness of US goods and promoting export growth. This is a positive for industries and companies that rely on exports. However, a lower exchange rate also means that the cost of imported goods in the United States will rise because more dollars will have to be paid to buy the same amount of foreign goods. That could lead to increased inflationary pressures and higher costs for consumers buying imported goods.

Second, a collapse in the exchange rate could cause investors to lose confidence in the dollar, triggering capital outflows. This could lead to turmoil in US financial markets and a fall in the prices of stocks, bonds and other assets. For companies and individuals that hold a lot of debt in dollars, a falling exchange rate will increase their debt burden because more of the debt will need to be repaid in their own currency. While fluctuations in exchange rates may reflect market concerns about the U.S. economy, it is too one-sided to conclude that the U.S. economy will collapse based on the collapse of the exchange rate alone. As one of the largest economies in the world, the United States has a relatively mature and stable economic system and strong ability to resist risks. To meet these challenges, the U.S. government and the Federal Reserve typically take a series of policy measures to stabilize the economy. For example, cutting interest rates to stimulate economic activity, or increasing government spending through fiscal policy.

In addition, a collapse in the exchange rate could affect economic growth in the United States by affecting exports and imports. While export growth may have provided some momentum, rising import costs and inflationary pressures could dampen consumption and investment, with negative implications for growth. As mentioned earlier, a falling exchange rate can lead to higher import costs, which in turn can push up the domestic price level. In addition, if the Federal Reserve adopts easy monetary policy in response to the economic slowdown, it could also exacerbate inflationary pressures. Faced with a plunging exchange rate and economic stress, the Fed is likely to adjust its monetary policy. For example, if inflationary pressures rise and economic growth slows, the Fed may consider cutting interest rates to stimulate the economy and stabilize financial markets. However, a rate cut could also exacerbate the fall.

In summary, the impact of a sudden collapse in the exchange rate on the US economy is complex and multifaceted. It may boost export growth but increase import costs, leading to capital outflows and financial market volatility, while affecting economic growth and inflation levels. To counter these effects, the U.S. government and the Federal Reserve are likely to take a range of policy measures to stabilize the economy and markets. However, the exact extent of the impact and the response will depend on a combination of factors.