Economists at HSBC examine how the US dollar is likely to behave if the US economy slows, and also how it would respond to slowing global growth. In their view, slower does not mean lower.

When the global economy is slowing meaningfully, the USD strengthens

“The USD reaction to slower US growth depends on the severity of the decline. Looking at links between the US Dollar Index (DXY) and US composite leading indicator (CLI) over the past 50 years shows that if the US economy shows signs of a steep deceleration, the USD tends to strengthen, while a more modest US slowdown generally leads to a weaker USD.”

“‘Too tight’ or ‘too loose’ would be USD positive. The implications of a US slowdown for the USD hinge on whether the Fed can deliver the goldilocks outcome, not too tight, not too loose. The risk is that the US economy falls into recession either because this is what it takes to bring inflation under control, or because the Fed makes a policy error and over-tightens.”

“Other economies face similar problems. We are not just facing a US slowdown, but a global one. History shows weaker aggregate CLI for all Organisation for Economic Co-operation and Development (OECD) countries is generally USD positive. A slowing US economy could also be especially problematic for the rest of the world, given their own struggles.”

“While there are many routes to a stronger USD, the single path to USD weakness is a narrow one. It requires an assumption that the US economy slows enough to temper Fed hikes but not so much as to induce a US recession, and that all of this happens while the rest of the world delivers better economic outcomes. It is not an impossible path, but we suspect it is not the most likely outcome.”