NY Fed nowcast down.
Figure 1: GDP (black), GDPNow of 4/1 (red triangle), GDPNow adjusted for gold imports (pink square), NY Fed (blue square), Goldman Sachs (inverted green triangle), SPGMI (orange inverted triangle), Survey of Professional Forecasters (light blue), all in billion Ch.2017$ SAAR. Source: BEA, Atlanta Fed, Philadelphia Fed, NY Fed, Goldman Sachs and authors calculations.
The dollar index is down 5.2% so far this year. Assuming tariffs lead to lower imports, tariffs should make fewer dollars available outside the U.S. That relative scarcity should drive the dollar’s value higher. In fact, the dollar did strengthen when the felon-in-chief won the election. Like stocks, the dollar’s strength faded once the felon’s actual policies became known.
During the mortgage crisis, the dollar strengthened, causing a good bit of initial confusion – economic weakness should have weakened the dollar. Then it was realized that the dollar had been a funding currency, and as loans were called, dollars had to be acquired by overseas borrowers to repay loans. Their scramble for dollars caused the dollar to rise.
Lately, high interest rates have meant the dollar has not been a funding currency, so rising expectation of recession would not strengthen the dollar through a withdrawal of credit. Quite the contrary – high interest rates have made the U.S. the target of lending inflows. With or without an expectation of U.S. rate cuts, withdrawal of credit should weaken the dollar this time. The increased expectation of rate cuts adds to credit-withdrawal outflows.
All of which is to say, dollar weakness is yet another indicator of rising recession risk. To top off the rise in recession risk, swings in the dollar, like swings in asset values and interest rates, add to overall market stress. It’s a dangerous positive feedback loop.