Strategists at Deutsche Bank put forward four potential scenarios to illustrate the possibility of a soft and hard landing for the U.S. economy under different growth and interest rate scenarios, and the subsequent impact on the dollar.
Alan Ruskin, chief strategist at Deutsche Bank, said that the unexpectedly strong January non-farm payrolls report, including 517,000 new jobs and a 3.4% unemployment rate, will bring a new look to the two landing scenarios of the US economy.
Ruskin reported on Thursday (9th) that the bright employment report may increase the prospects of a soft landing and a long-term hard landing for the US economy in the next six months. His definition of a hard landing is the same as that of the US National Bureau of Economic Research (NBER), which is two consecutive quarters of negative real gross domestic product (GDP) growth.
The greenback was one of the brightest performers in financial markets for much of last year, with the ICE U.S. Dollar Index (DXY ), which measures the greenback against a basket of major currencies, soaring as investors factored in rising U.S. interest rates and the risk of a global recession. highest level in 20 years. However, the DXY has fallen 5.8 percent over the past three months as markets question the Fed’s determination to fight inflation and its willingness to continue raising interest rates.
The U.S. dollar index tends to move in tandem with investors’ perceptions of potential moves in U.S. interest rates and the performance of the domestic economy relative to other regions.
Ruskin laid out four possible scenarios for US economic growth and interest rates, and how the dollar would react relative to other G10 and emerging market currencies under the four scenarios.
Of these, Scenario 2 seems closest to his idea of a soft landing for the U.S. economy over the next six months, followed by a recession in the second half of 2023 and early 2024.
Under Scenario 2, the terminal interest rate will reach 5-5.25%, or even higher, but it will start to cut interest rates earlier than the Fed expects. As for the impact on the exchange rate, the US dollar is estimated to be in a consolidation state against other G10 currencies in the first half of the year. Remain solid before weakening in the second half; EM currencies are likely to underperform for the rest of the year, both against the USD and other G10 currencies.
Ruskin explained that part of his growing optimism about a soft landing for the U.S. economy in the near term is that inflation has improved even as the labor market remains strong.
However, given that the Fed must tighten financial conditions while keeping inflation in check, he sees a greater chance of a policy error by the Fed and a higher risk of a hard landing for the U.S. economy six months from now.