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The U.S. Dollar: safe heaven in times of global crises?

The scenario of weakening global growth and high uncertainty favours the U.S. dollar, says Dr. Andrea Siviero, investment strategist at ETHENEA Independent Investors S.A. He sees potential for further appreciation.

The U.S. dollar continues to benefit from an aggressive Fed and a resilient U.S. economy. "Despite the tighter position of the ECB and the strong appreciation of the U.S. dollar in 2022, we expect the U.S. dollar to remain strong against the euro," comments Investment Strategist Siviero. In contrast, he sees a recession as almost inevitable in the coming quarters for the eurozone economy, which has been troubled by the energy crisis and declining confidence. "Given high sovereign debt and pronounced regional divergences, tightening ECB monetary policy remains a very difficult process. A tighter ECB policy could provide some short-term relief for the struggling Euro. Nevertheless, it is unlikely to change the underlying patterns of euro weakness."

U.S. economy appears to withstand tighter Fed monetary policy

In 2022, the U.S. dollar appreciated by about 14% year-on-year against the Euro, making it the strongest currency within the G10. Siviero sees several reasons for the greenback's overall strength: For example, despite some sluggishness in the first half of 2022, the U.S. economy appears to withstand high inflation and tighter policy with a strong labour market, healthy wage increases, and solid consumer and business spending. He sees a risk of recession in the U.S. in the event of excessive monetary tightening by the Fed. "In the coming quarters, U.S. economic growth is likely to surpass that of the eurozone and China," the expert said. "Over the past 18 months, the U.S. dollar has also benefited from its safe-haven status, attracting international capital flows in times of global crisis."

In addition, a "stagflation bonus" for the U.S. results from high inflation and weaker global growth. Siviero explains, "The strength of the U.S. dollar against the euro has been boosted by weaknesses in the eurozone economy and divergence between Fed and ECB policy." The European economy had not yet recovered from the recession triggered by the pandemic when it was hit hard by the consequences of the conflict in Ukraine and the resulting sanctions against Russia. The latter led to a sharp rise in energy prices and a surge in inflation, which severely reduced consumer and business confidence. While the U.S. Federal Reserve has raised its key interest rate by 250 basis points since March, the process of adjusting the ECB's monetary policy measures has been delayed by a weakening economy, market fragmentation (widening of sovereign bond spreads within the eurozone) and political tensions. In the summer, when inflation reached a record high, the ECB changed its tone and became much more aggressive in order to lower inflation and control inflation expectations.

Recession in Europe almost inevitable - China suffers from zero-covid policy and real estate crisis

Siviero sees especially Germany’s economy, which is highly dependent on Russian energy, being hit hard: "The German industrial sector is suffering from supply bottlenecks and weak domestic and global demand. Despite a healthy labour market, wage growth is subdued, and consumer confidence is at an all-time low due to shrinking household purchasing power." The ECB seems determined to continue its path of tighter monetary policy to bring inflation back to target levels. Despite increasingly expansionary fiscal policies and additional aid from several European countries, Ethenea's investment strategist sees a European recession as almost inevitable.

In China, the third major global economic bloc alongside the USA and Europe, the economy has also been slowing down for some time. The Covid-19 outbreak has caused a supply and demand shock this year. "Despite political support, the zero Covid policy and the deep crisis in China's real estate sector could trigger a recession," Siviero's assessed.