Slowdown in growth bodes ill for the dollar

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

In the Netherlands, it was not too bad, 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 National Park. Where it was not scorching hot, it could be quite windy at times. In the Houston region, nearly 3 million households and businesses were left without power after Hurricane Beryl passed through the area. In this light, it is a wonder that 114,000 jobs were added to the American labor market in July. However, that number was significantly lower than the 175,000 economists had expected.

Cooler economy or warmer planet?
Because the data collector Bureau of Labor Statistics reported that weather conditions had no impact on job development, economists immediately worried about a possible recession. However, it could very well be that the weakness in the labor market is caused by global warming rather than an economic cooling. A whopping 461,000 Americans indicated that they were not working due to weather conditions. This is the highest number in the nearly fifty years these figures have been kept and more than ten times the usual amount in July. The big question is whether Jerome Powell dares to gamble that the rising unemployment is the result of extreme weather.

Currency market seeks clues
In just under a month, Powell, as chairman of the Federal Reserve (Fed), along with his fellow board members, will have to make a decision on the policy rate. The central bank has been preparing for a 0.25% rate cut for some time. But if the American economy really starts to falter, a larger rate move may be necessary to prevent the growth pace from falling too sharply. It is no wonder that currency markets are eagerly awaiting the minutes of the most recent Fed meeting, which will be released on Wednesday. This also applies to the speech that Powell will deliver next Friday in Jackson Hole.

Countdown to September 18
In recent months, the dollar has already started a downward slide. Compared to the euro, the currency has lost nearly 4% of its value since mid-April. The dollar not only faces headwinds from the prospect of a declining policy rate, which makes it less attractive for parties to hold assets in the currency, but also from increasing tensions in the run-up to the presidential elections. For example, it is already noticeable that the Swiss franc has become a more popular safe haven during market turmoil than the dollar. Until the Federal Reserve makes its interest rate decision on September 18, this is unlikely to change soon.

Joost Derks

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

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