The Dollar Hasn't Said Its Last Word

The macro point

The U.S. calendar is almost empty due to the conflict between Republicans and Democrats over the budget, which has resulted in the postponement of the release of public statistics (with rare exceptions). In the absence of better options, we must rely on speeches from the members of the Federal Reserve's FOMC to get an idea of the actual state of the economy. During a speech last Tuesday, Cook indicated that the slowdown in the job market is not concerning for now. Remember, over the summer, the sharp downward revision of job creation had reignited fears of a recession. He also added that he expects inflation to return to the 2% target, despite tariffs, and explains the slowdown in job growth by the immigration policy of the Republican administration. We have a point of disagreement: we doubt that the Fed can return to 2% inflation soon. On the contrary, due to persistent inflationary pressures in services, it should rather be close to 3% next year. This is not a minor detail. Structurally high inflation might constrain the Fed to lower rates by less than expected.

Overall, however, the U.S. economy is in good health. There are points of fragility. Take construction spending, for example. Everything is down except for expenditures related to energy infrastructure and data centers. The AI boom is clearly the main driver of growth in the United States.

Finally, a little triumph for the White House. According to U.S. Treasury data released last week, tariffs collected between April (following Liberation Day) and September this year reached $150 billion—compared to an average of $30 billion over the past five years. This proves that the protectionist policy is working, at least in terms of increasing revenue.

In Europe, the microeconomy, that is, businesses, is doing better than expected. Certainly, there are dark spots, such as France, where business investment is stagnant due to budgetary uncertainty that should persist at least until the end of the year. But overall, large companies are doing well as the latest quarterly financial results have shown. They have especially managed to deal with the resurgence of American and Chinese protectionism and the rise of the euro, which was not a consensus at the beginning of the year. It is likely that the rapid rate cuts by the European Central Bank (ECB) have also been a support lever for businesses that have accessed lower-cost credit. This is not negligible.

Both in Europe and the United States, we expect growth to accelerate next year due to the beneficial effect of the rate cuts made in 2025.

Technical point

On the forex market, the dollar index, which measures the greenback's performance against the currencies of the US's main trading partners, rebounded to a three-month high last week. In detail, the increase was more pronounced against emerging market currencies than major ones. As we've indicated in recent weeks, we do not rule out the dollar continuing to decline slightly. But most of the decline is behind us.

On the UK side, the pound did not appreciate the new budget presentation last Tuesday, which will result in a widespread tax increase to avoid 'austerity,' according to the Chancellor of the Exchequer. In our view, the UK is facing the most complicated budgetary challenge among European countries (even worse than France!).

Finally, good news for the Chinese yuan. Its internationalization continues. Russia, which has aligned more closely with China since 2014, might issue sovereign bonds in yuan rather than just in rubles. The nominal amounts should remain low. However, it's symbolic and shows Moscow's economic and financial dependence on Beijing. In exchange rate terms, we estimate that the EUR/CNH pair should continue to fluctuate between 8.15 and 8.40 in the short term—the fluctuation range of recent months.

Announcements to follow

Due to the shutdown, October's consumer prices in the United States are unlikely to be published this week. Is this serious? Not necessarily. The market doesn't seem to care. A majority of money market participants are still anticipating a 25 basis point rate cut by the Federal Reserve in December.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as a basis or considered as an inducement to engage in any investment.