Sharp fluctuations in some of the world’s major currencies are injecting new uncertainty into the global economic outlook. The U.S. dollar index, which is weighted against six major world currencies (euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc) surged Monday to its highest level since May 2002. The last leg up was in part driven by a plunge in the British pound to a record low against the dollar. The British pound plunge has caught the focus of former U.S. Treasury Secretary Larry Summers, who said: “A currency crisis in a reserve currency could well have global consequences.”
Goldman Sachs and BlackRock are warning that markets are yet to price in the risk of a global recession. Ned Davis Research now sees a 98% chance of a looming global recession.
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While the U.S. economy is battling high inflation and flagging growth, it is viewed as being on a stronger footing than other major economies. That could push the dollar index to a near-term challenge of the 2001 high just above 121.00 — or even higher.
A surging greenback can hurt the profits of U.S. multinationals and also wreak havoc on global trade, with so much of it transacted in dollars. The dollar’s recent rise creates an “untenable situation” for risk-based assets, including stocks and commodities, according to Morgan Stanley’s chief equity strategist Michael Wilson. He said, “If there was ever a time to be on the lookout for something to break, this would be it.”
