US economy in freefall. What threatens the dollar?

12 months ago

The other day, one of the most respected publications in the world of finance and economics, The Wall Street Journal conducted a survey among economists. Most respondents believe that in the second quarter of this year, US GDP will fall by almost a third (relative to the corresponding period last year). The collapse of the global economy caused by the situation with coronavirus and quarantine measures is no surprise to anyone, however, the real economic scenario threatens more and more widespread damage. And the US economy is no exception in this regard. So, a month ago, the interviewed economists expected the fall of the US runway “only” by a quarter.

Currently, economists are hoping for a gradual resumption of business activity from the second half of 2020, but the overall growth rate of the US economy for the year will remain in a noticeable minus. Now, the experts surveyed expect a decrease in US GDP by 6.6% in 2020, although a month ago they predicted a decrease of less than 5%. It is possible that in the coming weeks or months, the forecasts of specialists will change for the worse.

The situation in the US labor market is particularly striking. For example, the current official unemployment rate is almost 15%, which at the beginning of 2020 would have seemed like an apocalyptic scenario. One of the representatives of the US Federal Reserve (an analogue of the Russian Central Bank) recently estimated the actual unemployment rate at 24-25%. However, one must keep in mind that in the US it is often more profitable to sit on unemployment benefits than to work. And even in the current crisis, the American state has taken care of its citizens (and non-citizens) so much that for someone unemployment benefits, coupled with emergency financial assistance, exceed the income from a lost job. Nevertheless, the collapse of the American economy is breaking all records and will certainly drag the whole world economy down for a long time.

How does the American dollar feel under such conditions and what threatens it with the fall of the US economy? And the dollar feels great! Since the beginning of this year, the dollar index to a basket of six major world currencies has grown by more than 4%. For comparison, the ruble over this period fell by almost 20%. Since the beginning of March of this year, when the world economy was just entering the acute phase of the crisis, the dollar index grew by almost 6% and is not going to retreat.

In today’s crisis conditions, one can once again observe the main market truth – when everything is bad, the American dollar becomes the only refuge in the eyes of investors. Even when everything is bad in the homeland of the dollar itself. Because if it is bad in the homeland of the dollar, then it will be worse for others – another market axiom. However, in a similar situation, the paradox turns out: as soon as the virus recedes and the American and world economies begin to recover, investors will again turn their attention to more risky assets around the world and begin to gradually get rid of the dollar. Does this mean that as soon as the first signs of a global economic recovery appear, the dollar should be sold? Actually not, because even during the period of stabilization of global economic growth, the dollar will be constantly supported by a number of other investors’ fears.

One of these fears will be the expectation of a new wave of pandemic and the deterioration of relations between the United States and China. Already, investors in the global financial markets are welcomed the gradual lifting of quarantine in different countries and at the same time are worried that the process will trigger a second wave of pandemic that will send the ambassador of the recent knockdown to the world economy already in a deep knockout. In turn, the US is increasingly insistently accusing China of a pandemic and is beginning to threaten its favorite economic sanctions. Trade disputes and sanctions between the two countries have already undermined the global economy last year, and now investors are afraid of a repeat of the situation. After recovering from global quarantine, the world economy will just miss the sanctions war between the United States and the Middle Kingdom. As a result, the dollar traditionally wins in almost any scenario on the global stage.

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