What you should know about the US dollar

There’s lots happening in the US at the moment. The Mueller inquiry into US-Russian collusion has come to an end, however the US dollar response was ‘rather apathetic’, according to Senior Currency Strategist at OFX Hamish Muress.

The US and China trade talks continue, biting at the already slowing US economy. Not to mention that all eyes are currently on the US Federal Reserve and the potential for hiked interest rates, however, the chances of a recession on the horizon are still weighing heavily on the minds of many.

What’s happening now: no solid progress in US and China talks and recession fears loom

The current economic slowdown in the US hasn’t been helped by the ongoing US-China trade war, which is weighing on global growth more generally. It has been a key driver for the US dollar, and if 2018 is anything to go by, the ongoing negotiations may actually see the US dollar strengthen throughout 2019.

As of now, negotiations appear to be nearing completion but it depends on whether China’s leader Xi Jinping will capitulate to the demands from the US as it risks losing face with the Chinese people. In the instance that China meets these demands, it may mean changing China’s economic development model, which has seen it grow into a massive world economy. 

In the midst of these negotiations, some tangible signs of a second recession loom. In March this year, the short-dated bond yields beat the longer 10-year bond rates, which is a key signal for recession. Markets remained static however, meaning that there’s now an expectation that there will be interest rate cuts from the Federal Reserve if the data becomes gloomier.

All eyes on the reaction of the US Federal Reserve

The Federal Reserve has indicated since last year that they would push on hiking interest rates, but the likelihood of this is waning, with the next move estimated to come next year instead.

Muress says of the Federal Reserve in the latest OFX Currency Outlook: ‘having raised rates in recent months, it [The Fed] would have some space to cut. Whether this would be enough to save the economy from a downturn remains to be seen.’

As the US economy continues to slow as a result of the trade war and ongoing uncertainty about interest rate cuts, all eyes will be on the Reserve to see how it reacts and whether it will be enough to stave off a full recession. 

What this means for businesses and their trading opportunities

While the impacts of the trade war have seen the US dollar move more favourably, this is bad news for companies buying goods and services from America. It’s best to speak to a currency expert to discuss how you can protect your business position if it’s exposed to the US dollar. 

With the current state of the Federal Reserve, any continued slowing of the US dollar could see more businesses shun riskier assets. The US also isn’t the only economy slowing, with China and Europe in the midst of slowing down, this may well translate into slower growth of US exports. 

Not to mention that all three are regions that power the global economy, so slow movements in each is likely to have an impact on businesses with main suppliers and/or customers in these regions. 

All this means that staying on top of market movements using tools like Rate Alerts, Daily or Weekly Market Commentary from currency specialists or Forward Contracts (to secure a rate now and transfer later), are all favourable options for businesses moving forward in this time of uncertainty.

IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.

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