Asian markets are losing ground again on Friday and are on track for their worst monthly decline since last March. Still, we see a noticeable improvement in sentiment compared to the start of the week. The 0.8% drop in MSCI Asia-Pacific Asian indices on Friday is quite understandable due to the attraction of the dollar and pressure on risky assets at the end of the month and week, which could reach the end of the day.
At the same time, the background of the news so far remains on the side of a weaker dollar. Macroeconomic data did not come as a surprise. The number of people receiving unemployment benefits in the US stagnated again after the momentum of the fall at the beginning of the second quarter. The number of initial applications for the last two weeks again exceeds 400,000.
According to provisional estimates of US GDP for the second quarter, the economy was 0.5% above its pre-pandemic peak. However, the growth rate last quarter did not accelerate, as economists expected on average. The announced growth was 6.5% compared to 6.3% in the previous quarter.
The data generally indicate a relatively high rate of economic growth. However, the stagnation of the labor market is a matter of caution and does not pave the way for a normalization of monetary policy. At the same time, GDP is recovering fairly quickly until its pre-crisis trajectory.
This seems like one of the worst-case scenarios for the dollar, as it would force the Fed to take a wait-and-see approach, turn a blind eye to high inflation, and continue to feed the economy with easy money. Part of this liquidity enters the markets, causing a further rise in the prices of listed assets.
We must not forget the fundamental reason for the weakening of the dollar: high inflation is eating away at its purchasing power. The two-year US bond is now yielding 0.2% in a situation with inflation of 5.4% and price growth of 3.4% in 2021 and 2.1% in 2022.
Fundamentally, the dollar is based only on its reserve currency situation and a high degree of uncertainty in a world where it is now not easy to find an alternative. Each region has its own set of doubts, from fears of stagnation in Europe to threats of market capitalism in China.
However, investors should remember that the pound sterling was once the main reserve currency, with its strength based on power in the colonies. But that did not stop the pound from declining by the middle of the century. The United Kingdom half a century ago and the United States now have in common their reserve currency situation and the high debt burden. A stagnant labor market will tie the Fed’s hands to the normalization of monetary policy.
He FxPro Team of analysts
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