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The U.S. economy may be moving toward a recession with job-market conditions deteriorating, but Macquarie Group strategists said they wouldn’t knee-jerk that prospect into a weak view of the U.S. dollar yet.
The unemployment rate in the August jobs report, due next week, may rise further, to 4.5% from 4.3%, and the latter rate in the July jobs report spurred recession fears and a selloff in stocks (SP500)(COMP:IND)(DJI) earlier this month. Macquarie said traders this week already saw consumers sounding less optimistic about the job market in the Conference Board’s August consumer sentiment survey.
“What is the implication of having drifted toward the demarcation line of the “no recession”/ “yes recession” divide? The implication may not be a weaker USD,” Thierry Wizman and Gareth Berry, FX and rates strategists at Macquarie, said in a Thursday note.
“For one, the difference between “recession” and “no recession” is one of political messaging, mainly,” they said as the U.S. moves toward the November presidential election. Republican Party nominee Donald Trump may be aided in the polls by the weakening economic narrative, which “could spark a “Trump trade” toward the USD, on the premise that Trump’s fiscal and other policies would be inflationary,” the strategists said.
Re-fueled recession worries could hurt the dollar (DXY) as it forces the Federal Open Market Committee to accelerate rate cuts. “But we’re not sure that this will happen,” as not all FOMC members would endorse a recession view yet, Macquarie said. “Even if the Fed does accelerate cuts, it is also likely to cause other countries to acknowledge their own recessions, or risk of recessions,” with the strategists noting Germany’s negative growth in Q2.
A “more dovish” European Central Bank and Bank of England may be another surprise, “further supporting the view of a topping formation in the EUR/USD and GBP/USD,” Wizman and Berry said.
Also, the “haven-buying impulse – prominent during global slowdowns – could also help the USD,” if the U.S. enters a recession, they said. In that, so-called risk-off and haven-buying forces could take hold as U.S.-held assets abroad are repatriated, and flowed back into USD assets onshore.
The U.S. Dollar Index (DXY) was up 0.2% year-to-date as of Friday, off its 2024 highs. YTD, the dollar was down 0.4% against the euro (USD:EUR)(EUR:USD) and has dropped 3.3% against the British pound (USD:GBP)(GBP:USD).
Among currency ETFs are (UUP), (USDU), and (UDN). 
