- The dollar sank to a one-month low on Monday after data last week showed the US is technically in recession.
- It reflects a “sell-the-fact” reaction in markets as investors expect milder Fed rate hikes.
- A weak Chinese economy is also affecting the performance of the greenback on demand concerns.
The dollar tumbled to a one-month low against a basket of major currencies on Monday after data showed the US economy has entered a technical recession, prompting investors to think the Federal Reserve may be slower to raise interest rates.
The dollar index, which measures the greenback’s performance against six other currencies including the Japanese yen, slipped 0.52% to trade at $105.35 – its lowest since July 5.
The safe-haven currency has endured sharp sell-offs in recent weeks, only rising on two days since mid-July as a “sell-the-fact” reaction hits markets over expectations that the Fed will become less aggressive in its monetary policy after data showed US GDP contracted for two straight quarters – the technical definition of a recession.
“It’s likely that we’re going to see a relatively more dovish Fed moving forward, whereby even if there are more rate hikes, they’re unlikely to be at the same 75-bps pace we’ve seen over the past two meetings – which is not good news for the US dollar,” analysts at DailyFX wrote.
The Fed has been battling a to cool raging inflation with swift rate hikes, having delivered another just last week, when it raised the benchmark interest rate by 0.75 percentage points, extending a streak of larger-than-usual hikes.
While the central bank tries to tame inflation however, it runs the risk of pushing the US economy into a recession, which is highly likely, according to industry experts.
One markets-based indicator of recession is the bond market’s three-month bill premium, which measures the difference between the yield on three-month Treasury bills now and 18 months in the future. It fell by the most on record in July, indicating a growing concern among investors that recession may be imminent.
Meanwhile, weakness in China has weighed down on the dollar too. Poor manufacturing activity in China suggests that decreasing demand from the world’s second-biggest economy means that there could be a fall in global energy demand and global trade.
“The talk of safe havens is once again turning out to be of little help. Everything that currently endangers the prospect of high energy prices and thus high US terms of trade is bad for the US dollar,” analysts at Commerzbank said.