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Recession on the cards: So why is the US dollar surging?

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The US dollar is surging, as fear of a recession means investors move towards a safe haven.

Rising inflation and growing fears that the US economy is already in a recession is failing to slow down its dollar, which over the last week surged to a 2-decade high, an industry expert reveals.

Inflation is at a multi-decade high in the US.

But an equally aggressive response to inflation, which saw the US lift rates by 75 basis points last month, is leading to investors buying US dollars.

"Reiteration of the Fed's commitment to stamp out inflation saw the US dollar rise to its highest level against the euro since 2002, and against the yen since 1998," Tiger Brokers' chief strategy officer Michael McCarthy said.

As such, 1 Australian dollar currently buys 68 US cents, which, if it sounds low, is because it is.

The Australian dollar is usually this low during recession periods, including the 2020 COVID-19 crash and the global financial crisis back in 2008.

Atlanta Fed data says the US is already in a recession

The latest figures released by the Atlanta Federal Reserve Bank's GDPNow model, which is a key measure of how the US economy is going, suggests the country is already in a recession.

According to the stats, the US real gross domestic product (GDP) shrank by 2.1% over the last 3 months.

Following a first quarter fall of 1.6% this would fit the technical definition of a recession, which is 2 negative quarters. Although it should be highlighted that this is just a guide and does not mean the US is currently in a recession.

The forecasts are about a year in front of market analysts.

Wall Street estimates are predicting the US would enter a recession in 2023.

Hang on, if the US is going into a recession why is its dollar worth more?

Even with the US having its own economic issues, its dollar is seeing support.

This is due to 2 main factors:

  1. The US dollar is a safe haven
  2. When interest rates rise so does the local currency.

And there are signs the US inflation rate is easing.

As such, Betashare's economist David Bassanese now believes it's a race against time to see if the US will fall into a recession.

The economist says the US can avoid a recession "but only if US inflation slows quickly enough to allow the Fed to pause within the next few months," he said.

"There are signs that US inflation in some areas is cooling, notably used cars, clothes and furniture. And there's also encouraging signs that red-hot wage inflation is easing somewhat."

But the economist points out pressures in rents and energy remain high.

Implications for investors

Stocks have ticked steadily downwards as the Fed continues to raise rates, but this will prove ultimately favourable for stock pickers.

According to Bell Asset Management's portfolio manager Adrian Martuccio, the current market volatility will ultimately prove favourable for investors, but they might have to wait a few months.

"A lot of the companies we spoke to said margin expectations across the market are still too high so consensus forecasts need to come down. This is likely to take another couple of quarters," he said.

"Stock prices have factored a lot of this in, but it will be hard for companies to rally convincingly in the face of downgrades."

However, the portfolio manager points out that not all shares will rise equally, with the tech sector facing funding headwinds, while inflation will continue to impact a number of businesses' balance sheets.

"Input cost inflation only started in March and April of this year so we believe the full margin effect is unlikely to be seen until closer to the end of this year," Martuccio concludes.

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