Dollar Index Plunges on Increasing Concerns Over U.S. Recession

The Canadian Dollar rose 0.15% against the U.S. Dollar. Gains were limited by a steep drop in crude oil prices. The Euro posted a 0.46% gain against the dollar, but due to its heavy weighting, it had the biggest influence on the index’s decline.
James Hyerczyk
U.S. Dollar Index

The U.S. Dollar plunged against a basket of currencies last week, falling from a three-week high, after President Donald Trump ordered U.S. companies to start looking for an alternative to China. The move took place in response to Beijing imposing more tariffs on American goods, further escalating tensions between the two economic powerhouses in a prolonged trade dispute.

Last week, September U.S. Dollar Index futures settled at 97.530, down 0.477 or -0.49%. For the month, the index is down 0.74%.

Contributing to the greenback’s weakness was a dovish speech by Federal Reserve Chairman Jerome Powell.

The British Pound posted the largest gain against the U.S. Dollar, settling 1.09% higher. Besides the comments from Trump and Powell, the Sterling was boosted by renewed hopes that there might be a Brexit outcome that isn’t the dreaded no-deal scenario.

Safe-haven buying fueled by a steep plunge in U.S. stock indexes helped boost the Japanese Yen 0.85% and the Swiss Franc 0.36%.

The Canadian Dollar rose 0.15% against the U.S. Dollar. Gains were limited by a steep drop in crude oil prices. The Euro posted a 0.46% gain against the dollar, but due to its heavy weighting, it had the biggest influence on the index’s decline.

Trump Escalates US-China Trade Tensions

President Trump triggered a steep break in the U.S. Dollar when he tweeted, “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”

The move by the greenback indicates there are increasing concerns that Trump’s latest comments will push the U.S. economy into a recession.

Dovish Comments from Fed’s Powell Caps Dollar’s Gains

Although the biggest reaction in the markets was to Trump’s tweet, remarks from Federal Reserve Chairman Jerome Powell did put some pressure on the dollar due to their dovish nature.

Powell did not announce a major stimulus measure to ease concerns over a slowdown in global economic growth, but did prepare investors for further interest rate cuts. Powell acknowledged the U.S. economy was in a “favorable place” and the Fed would “act as appropriate” to keep the current economic expansion on track.

Weekly Economic Data and FedSpeak

It was a fairly quiet week as far as economic data was concerned, but several Fed speakers and of course, Powell drew most of the attention.

On the positive side, Existing Home Sales came in at 5.42M, nearly matching the 5.41M forecast. Weekly Unemployment Claims rose 209K, below the 217K estimate. The Conference Board’s Leading Index was up 0.5% and the previous month was revised higher to -0.1%.

On the negative side, Flash Manufacturing PMI entered contraction territory with a reading of 49.9, below the 50.5 forecast. Flash Services PMI came in at 50.9, below the 52.9 estimate. Both were revised slightly higher in the previous month.

A couple of Fed speakers rattled stock market investor sentiment last week, providing some support for the dollar with hawkish comments. Kansas City Fed President Esther George indicated Thursday in an interview on CNBC that she would not support further interest-rate cuts and Philadelphia Fed President Patrick Harker said he reluctantly supported the July rate cut but now wants to keep rates steady.

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