The US currency went through a kind of manipulation and showed a short-term decline, after which it confidently consolidated its current positions. According to analysts, the dollar's succeeding course will be growth. However, such dynamics of the USD confuses the euro, which is trying to grow. Sometimes the euro's efforts lead to success, but they are effective only in the short term. At the same time, both key currencies are under pressure from growing threats to the global economy.
On Thursday, October 20, the greenback rose against other currencies, primarily against the EUR. At the same time, the yield of US Treasury bonds reached multi-year highs, and the Japanese currency collapsed to a new 32-year low. Underlying yields on 10-year Treasury bonds soared to 4.148%, the highest level since 2008, experts estimate. Following it, the yield of two-year US Treasury bonds increased, which reached a 15-year peak of 4.58%. According to currency strategists at National Australia Bank (NAB), "highs for this cycle" are possible in the near future on the back of a steadily rising dollar.
The focus of the markets - macro data on the labor market and real estate in the US, which will be published later on Thursday, October 20th. According to preliminary forecasts, the number of initial applications for unemployment benefits in the country increased by 2,000 over the week, reaching 230,000. As for the US real estate market, in September the number of purchase and sale transactions in the secondary market decreased to 4.7 million. Recall that in August this figure was 4.8 million.
Particularly noteworthy are mixed data on inflation in a number of countries, in particular from the UK, Canada and New Zealand, published this week. Current economic indicators have shown that central banks around the world are far from curbing ever-increasing inflation. Fueling the fire are fears of a recession. This situation creates a steady demand for defensive assets such as gold and USD.
According to analysts, at the moment the US economy is quite stable, and there are no reasons for its subsidence. Economic growth in the US is not hindered by either high inflation or the threat of a recession. However, when the economy is growing excessively, the Federal Reserve has to raise the rate all the time to avoid overheating. It should be noted that amid tightening the Fed's monetary policy, financial conditions are deteriorating and lending is becoming more difficult. At the same time, risk appetite remains on the markets, experts emphasize.
In such a situation, the greenback is holding steady, gaining momentum and pushing the euro back. The euro's short-term victories do not lead to cardinal changes in the EUR/USD pair, which was trading near 0.9788 on Thursday. According to preliminary forecasts, in the near future the pair will remain in a wide range of 0.9500-0.9900. At the same time, analysts do not exclude the "Christmas rally" of the EUR/USD pair by the end of this year.
A similar point of view is shared by economists at Nordea Bank, who expect the pair to return to lower levels. The specialists believe that by the beginning of 2023 the EUR/USD pair will reach the price bottom amid worsening trading conditions.
Nordea Bank is confident in the continuation of the dollar rally due to the difficult economic environment. "The painful situation that has developed in the financial markets is favorable for the growth of safe assets such as the dollar. In addition, the US economy is quite stable and is in a better position compared to the countries of Europe and Asia," experts emphasize.
"A drop of negativity in a barrel of positivity": Nouriel Roubini's gloomy economic forecasts
The tension of the geopolitical background and economic instability are forcing analysts to revise the previous figures. In the future, the studies of the major economist Nouriel Roubini, nicknamed "Dr. Doom", are especially relevant in the coming months. His forecasts for the global economy are distinguished by their accuracy and detailed analysis.
Earlier, Roubini predicted the financial crisis of 2008, and now he is talking about a "long and ugly" recession in the US and around the world, which will come at the end of 2022 and last into 2023. In addition, the specialist expects a "sharp correction" of the largest S&P 500 index, which will fall by 30% during the recession. At the same time, the economist does not rule out a 40% drop in the index if there is a "real hard landing" in the economy.
In the course of the study, Roubini draws attention to the high debt ratios of global corporations and governments. As interest rates rise and debt service costs rise, "many zombie institutions, households, corporations and shadow banks will die. This also applies to zombie countries," warns Roubini. According to the analyst, the global level of debt is pulling the stock markets to the bottom. At the same time, achieving an inflation rate of 2% without a hard landing of the economy is an "impossible mission" for the Fed. In the near future, Roubini expects the central bank to raise the rate by 75 bps. At the next meetings of the Fed, scheduled for November and December 2022, it is possible to raise it by 50 bps. As a result, by the end of this year, the federal funds rate will range from 4% to 4.25%. At the same time, as soon as the Fed finishes raising rates, the markets will be overwhelmed by a wave of liquidity, experts believe.
The ever-increasing inflation, especially in the wages and services sector in the US, means that the central bank has no choice but to further raise the key rate. Negative factors add fuel to the fire, namely the upheavals caused by the coronavirus pandemic, the Russian-Ukrainian conflict and China's zero-tolerance policy towards COVID-19. According to Roubini, this contributes to "patching up financial holes" and reducing economic growth in the United States. At the same time, the current tasks of the Fed, which include curbing inflation and eliminating the conditions for the onset of a recession, are becoming more difficult to implement.