How a slowing US economy could impact the rest of the world and put the spotlight on the dollar

By Vivien Lou Chen

Investors, traders and analysts are weighing the potential impact of a weakening US economy on the rest of the world, with some concluding that a less dollar-friendly environment is on the horizon. T) – one in which the US is dragging other countries with it, the other is that the world’s largest economy diverges from its peers – the latter seen as more likely in the coming months. In a note on Tuesday, the strategists said they see “a period of decoupling rather than a related slowdown,” with China acting as a “buffer” against the deteriorating US outlook, and that the “growth divergence theme” is looming after the March’s turbulence is likely to exacerbate the banking sector. Growth divergence is just the latest tale unfolding in financial markets, which have oscillated between recession and inflation fears, and is a particularly important theme in the 24-hour FX markets. The ICE US Dollar Index is currently down nearly 11% from its peak last year. It fell 0.6% on Wednesday after the consumer price index showed moderate gains in March, and has fallen for four consecutive weeks. The broader global macroeconomic landscape should result in a “less USD-friendly environment” and near-term rallies. The greenback “should be viewed with skepticism,” said TD strategists Mark McCormick, Mitul Kotecha, Mazen Issa and Ray Ng. “We continue to expect a deeper USD correction in the coming months and would therefore use any rally as an opportunity to sell it on.” Recent stress in the banking sector could weigh significantly on US economic growth next year, according to the International Monetary Fund, which added that it is too early to tell if the problems were isolated events. In addition, the US and global economies are likely to be hampered by higher inflation and interest rates for years to come, the IMF said, even as countries like China and India are on track for relatively stronger growth. Read: IMF sees hard landing risk strong climb. Here’s why

TD expects the ICE US Dollar Index to hit 97.30 by year-end, down from Wednesday’s level of around 101.56. And TD is not entirely alone in his thinking. On Tuesday, UBS Global Wealth Management’s Solita Marcelli and Alejo Czerwonko said they expect the dollar to weaken “as US growth and interest rate premiums ease relative to the rest of the world in the coming months.” that our call for a weaker US dollar in the near term is not based on the assumption of a declining global currency status,” the statement said.

They recommend investors “diversify their dollar cash or fixed income holdings, reduce allocations to US equities or positions in options or structured strategies that could generate positive returns in the event of dollar weakness.” On a relative basis, Marcelli and Czerwonko, chief investment officers of Americas and Emerging Markets Americas respectively, said they prefer the Australian dollar, Swiss franc, euro, pound and yen. On Wednesday, investors digested a mixed sentiment on inflation from the March US CPI and minutes from the March Federal Reserve meeting. All three major US stock indices ended lower, while Treasury yields mostly ended lower.

-Vivien Lou Chen

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04-12-23 1610ET

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