Investors, traders and analysts are weighing the potential ramifications of a slowing U.S. economy on the rest of the world, with some concluding that a less dollar-friendly environment is in store.
Of the two potential scenarios foreseen by strategists at TD Securities
TD,
— one in which the U.S. pulls down other countries with it, the other being that the world’s largest economy diverges from its peers — the latter is regarded as more likely in the months ahead. In a note on Tuesday, they said they see “a period of decoupling rather than a correlated downturn,” with China acting as a “buffer” against deteriorating U.S. prospects, and that the “growth divergence theme” is likely intensifying following March’s turmoil in the banking sector.
Growth divergence is just the latest narrative to unfold within financial markets, which have toggled between recession and inflation fears, and is a theme particularly important in the round-the-clock currency markets. On Friday, the ICE U.S. dollar Index
DXY,
slid for a fourth straight week after various U.S. data missed expectations; it is currently off by about 10% from its peak last year.
The broader global macroeconomic landscape should lead to a “less USD-friendly environment” and any short-term rallies in the greenback “should be met with skepticism,” said TD strategists Mark McCormick, Mitul Kotecha, Mazen Issa and Ray Ng. “We continue to expect a deeper USD correction in the months ahead, so would use any rallies as opportunities to resell it.”
Recent banking sector stress could meaningfully lower U.S. economic growth over the next year, according to the International Monetary Fund, which added that it’s to soon to say whether the issues amounted to isolated events. Moreover, the U.S. and global economies are likely to be hobbled by higher inflation and interest rates for years, the IMF said, although countries like China and India are on pace for relatively stronger growth.
Read: IMF Sees Risk of Hard Landing Rise Sharply. Here’s Why.
TD sees the ICE U.S. Dollar Index reaching 97.30 by year-end, down from Tuesday’s level of around 102. And it isn’t entirely alone in its thinking.
On Tuesday, Solita Marcelli and Alejo Czerwonko at UBS Global Wealth Management said they expect the dollar to weaken “as the U.S. growth and interest rate premium relative to the rest of the world erodes in the coming months.”
“It is important to note that our call for a weaker U.S. dollar in the near future is not based on the assumption of a declining global currency status,” they said in a note.
They recommend that investors “diversify their dollar cash or fixed income holdings, reduce allocations to U.S. equities, or position in options or structured strategies that could deliver positive returns in the event of dollar weakness.” On a relative basis, Marcelli and Czerwonko, chief investment officers of the Americas and Emerging Markets Americas, respectively, said they prefer the Australian dollar, the Swiss franc, the euro, the pound, and the yen.
On Tuesday, investors remained in wait-and-see mode ahead of Wednesday’s U.S. consumer-price index report for March. U.S. stocks
DJIA,
COMP,
were mixed in afternoon trading, while Treasury yields were little changed to slightly higher.
This post was originally published on Market Watch
