By Vivien Lou Chen
U.S. growth prospects remain the top factor driving currencies like the dollar, and the possibility of both a soft and hard landing occurring over different time frames this year has one major Wall Street bank charting the potential implications.January’s unusually strong jobs report — which contained a blowout 517,000 new jobs created and a 3.4% unemployment rate — likely gave new life to both landing scenarios, according to macro strategist Alan Ruskin at Deutsche Bank. In a note on Thursday, Ruskin wrote that the blockbuster jobs report may have added to the prospects of a soft landing in the economy within the next six months, as well as a hard landing over the longer term. He defines a hard landing as “anything that falls into the realm of an NBER [National Bureau of Economic Research-declared] recession, likely with two negative quarters for real GDP growth.”The dollar was one of the financial market’s winningest currencies for much of last year — soaring to the highest levels in two decades, as measured by the ICE U.S. Dollar Index DXY, with investors factoring in higher U.S. interest rates and the risks of a global recession. The index has fallen 5.8% during the past three months, however, as investors and traders periodically questioned the Fed’s inflation-fighting resolve and willingness to keep hiking rates.
The greenback tends to move in conjunction with investors’ views on where U.S. rates are likely to go, and on how well the domestic economy is likely to perform relative to the rest of the world.Read:How the U.S. dollar could put this stock-market rally to a big testRuskin lays out four possible scenarios for U.S. growth and interest rates, and how the dollar might react relative to its G-10 peers and emerging-market counterparts. Scenario 2 seems to come closest to Ruskin’s thinking: It foresees the dollar trading either sideways or firmer in the first half of the year against other G-10 currencies, before weakening in the second half. Meanwhile, emerging-market currencies would be prone to underperforming against the greenback through the end of June, as well as other G-10 currencies over the remainder of 2023.
Part of the reason for recent growing optimism about a short-term soft landing is that inflation has improved even as employment remains strong. Meanwhile, there’s a growing risk of a hard landing beyond the next six months because of the Fed’s need to still control inflation and tighten financial conditions — raising the chances of a policy error, Ruskin said.”This is the exact opposite of the path that we seemed to be on” before January’s jobs report, when the risks of a recession seemed to be pulled forward, the strategist wrote.
Also see: Top Wall St. economist says ‘no landing’ scenario could trigger another tech-led stock-market selloffThe U.S. Dollar Index was up 0.3% as of Friday and headed for a 2.4% gain for the week. Meanwhile, major U.S. stock indexes finished mostly higher.
-Vivien Lou Chen
(END) Dow Jones Newswires
02-11-23 1250ET
Copyright (c) 2023 Dow Jones & Company, Inc.
