May 17, 2022

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What will the US recession do to the dollar?  - Comment Justin Terks

What will the US recession do to the dollar? – Comment Justin Terks



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Comment Just Terks



4:00 pm today

A significant movement in the US interest rate market has frequently signaled a recession in the past. If the US economy really wins, it may sound stronger against the dollar.

It is impossible to see the future. But it remains to be seen how accurately the bond market will predict a recession in the United States. Once 10-year Treasury yields fall below two-year bond yields, things are not going well for the US economy. Since the 1970s, the bond market has provided such a signal eight times. Each time, the US economy went into recession after 6 to 24 months. With the worrying news of rising energy prices and rising inflation, it is not surprising that some people are worried about the US economy.

The recession signal does not apply to the Netherlands
A recession in the United States could put pressure on the dollar. The economic downturn often triggers one or more interest rate cuts at the central bank. The US Federal Reserve has more room for this than the ECB. That difference will only widen if interest rates rise further in the United States this year, as expected in response to higher inflation. Coincidentally, the Dutch interest rate market does not currently indicate a recession. The yield on two-year government bonds (0.09%) is significantly lower than on ten-year bonds (0.86%). Also, the difference has increased slightly in recent months. A similar pattern is emerging in Germany’s economic superpower.

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Big difference from previous recession signals
The dollar has already taken a step back in recent days. Are traders already positioning themselves for a possible recession? In fact, the recent dollar pressures are primarily caused by what is happening in Ukraine. Russia promised to withdraw, reducing the possibility of a major escalation of the war. As a result, safe haven currencies – such as the dollar – are becoming less popular. Moreover, it is not yet certain whether a recession will occur. Two- and ten-year yields are close to each other, but not yet firmly crossed. The biggest difference between the previous recessions is that long-term interest rates have risen significantly in recent months. There are two reasons for this.

Interest rates were artificially low
First, rising interest rates are a sign that investors’ inflation and growth expectations have risen in recent times. In addition, the US Federal Reserve has phased out support measures introduced during corona epidemics. In recent years, long-term interest rates have been artificially reduced by such measures. If no action is taken, the ten-year yield is now likely to be higher. As such, the risk of recession is low. For now, however, it’s too early for real concerns about the U.S. economy and the dollar’s slide.

Farmers Business.NL

Just Terks

Just Justs is a currency expert iBanFirst† He has more than twenty years of experience in the world of currency. This column reflects his personal opinion and is not considered professional (investment) advice.

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