How a decelerating U.S. economy could impact rest of world, putting spotlight on the dollar

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 — 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 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.”
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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.” ...

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The IMF on Wednesday warned that a U.S. economic downturn remains "within the realm of possibilities," despite encouraging data to the upside.

First managing director Gita Gopinath said the IMF had been surprised by the strength of the U.S. labor market and consumer spending, prompting it to revise up its economic growth forecasts for the country.
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Still, Gopinath noted that the economy remains in a precarious position, with little room for error.

"If you look at our growth numbers, we're looking at very low growth numbers for the U.S., and so the risks of a hard landing remain," she said.

Asked if such a shift from growth to low or even negative growth could be prompted by the Federal Reserve's ongoing interest rate hikes, Gopinath said it was conceivable.

"It is within the realm of possibilities that events of this kind could happen," she said.
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Joe King said:

Yea, consumer spending. Lol That's not gonna last.

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