Slowdown in growth does not bode well for the dollar

In the run-up to the American presidential elections, there are some hairline cracks in the economic growth engine of the United States. The central bank cannot avoid lowering the policy rate – and indirectly also the dollar – a notch.

It wasn't too bad in the Netherlands, but large parts of the United States have had a hot summer. An American heat record of 53,8 degrees was even set in Death Valley Natural Park. Where it was not scorching hot, it could sometimes be quite windy. In the Houston region, nearly 3 million homes and businesses were without power after Hurricane Beryl passed through the area. Viewed from this perspective, it is still a miracle that 114.000 jobs were added to the American labor market in July. However, that number was much lower than the 175.000 economists had expected.

Cooler economy or warmer planet?
Because figures collector Bureau of Labor Statistics reported that weather conditions had no influence on job development, economists immediately became concerned about a possible recession. Yet it could be that the weakness in the labor market is caused by global warming instead of a cooling of the economy. As many as 461.000 Americans have indicated that they were not at work due to weather conditions. That is the highest number in the almost fifty years that these figures have been kept and more than ten times what is usual in July. The big question is whether Jerome Powell dares to gamble that rising unemployment is the result of weather extremes.

Currency market looks for clues
In just under a month, Powell, as chairman of the Federal Reserve (Fed), will have to make a decision with his fellow directors about the policy interest rate. The central bank has been anticipating an interest rate cut of 0,25 percentage points for some time. But if the US economy really starts to falter, a bigger interest rate move could be necessary to prevent the growth rate from falling too sharply. It is therefore no wonder that currency markets are eagerly awaiting the minutes of the latest Fed meeting to be released on Wednesday. This also applies to the speech that Powell will give in Jackson Hole next Friday.

Countdown to September 18th
The dollar has already started to slide in recent months. Against the euro, the currency has lost almost 4% of its value since mid-April. The dollar is not only facing headwinds from the prospect of falling policy rates that make it less attractive for parties to hold assets in the currency, but also from rising tension in the run-up to the presidential elections. For example, it is already noticeable that the Swiss franc has recently been a more popular shelter during market turmoil than the dollar. Until the Federal Reserve cuts the interest rate decision on September 18, this will not change quickly.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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