US Dollar Emerges Near 105.5 Mark as Global Economic Outlook Worsened

Updated:

The dollar enjoyed some safe-haven demand on Friday as woes over the global economic outlook worsened. The Australian dollar, which is tightly bound to the global economic performance, crashed to a two-year low against the dollar Friday.

Over the months, persistent inflation and a frantic reaction by top central banks to stave off a recession by raising interest rates to plug the flow of cheap cash has sparked massive sell-offs across risk markets and bolstered asset candidates as safer bets.

The dollar recorded decent gains on Friday despite a drop in US Treasury yields, as the global economic downturn weighed heavily on the benchmark 10-year bonds, sending it to a one-month low.

Recent Dollar Gains a Product of Fear of a More Aggressive US Fed

The dollar’s strength came from concerns that the US Federal Reserve will continue to raise rates exponentially to combat inflation and the possibility of this effort hurting the economy.

Commenting on the recent dollar performance, Joseph Trevisani, a senior analyst at FXStreet, explained:

“You have weakening rates against the dollar competing against [the] fear of a global recession and enormous amounts of debt and all sorts of other problems.”

Meanwhile, economic data releases showed that US manufacturing activities dropped to worse-than-expected levels in June, with new orders contracting for the first time since 2020, signaling a cooling in the economy.

Also, general expectations for the US Fed rate hikes dropped by 68 basis points (bps), with money markets pricing-in a peak of 3.32% in March 2023, a decline from previous estimates of 4%. This readjustment of rate hikes expectations came after the June 14-15 Fed meeting. At press time, the US Fed’s lending rate is 1.58%.

Kenneth Broux, an FX strategist at Societe Generale, had this to say about the dollar’s performance:

“It’s a risk-off start to the second half of the year with equities and commodities down, so the dollar is stronger pretty much across the board.”

 

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Azeez Mustapha

Azeez Mustapha is a trading professional, currency analyst, signals strategist, and funds manager with over ten years of experience within the financial field. As a blogger and finance author, he helps investors understand complex financial concepts, improve their investing skills, and learn how to manage their money.