USD Index Drops 1.5% Amid Recession Fears

Here’s this week’s overview of the US Dollar:

• In the past week, we saw the US Dollar Index drop sharply by 1.5% against a trade weighted basket of its peers.

  
  

• The dollar index fell toward 103 on Monday, hitting its lowest levels in 20 weeks as a weak US jobs report fuelled concerns about a recession, while supporting bets on deeper rate cuts from the Federal Reserve.

  
  

• Data on Friday showed that the US economy added 114,000 jobs in July, well below market expectations of a 175,000 increase.

  
  

• The unemployment rate also unexpectedly jumped to a 2021-high of 4.3% and wage growth slowed more than expected.

  
  

• These events contributed to a world-wide drop in equity markets, compounded by correction in the valuations of AI-related stocks and geopolitical tension.

  
  

• Markets now see an over 70% chance of a 50 basis point Fed rate cut in September, with an 85% chance of 125bp total easing by year end.

  
  

• The Dollar’s ongoing weakening against the Yen was also contributed to by a hawkish turn in Bank of Japan monetary policy. Meanwhile, the greenback gained some ground against risk-sensitive currencies as global economic uncertainties and geopolitical risks in the Middle East spurred safe-haven flows out of exposed currencies.