US Dollar Fall Sparks Global Recession Fears: BofA Warns of Slower Growth, Deflationary Pressur Globally

Large Fall in US Dollar: Is a Global Recession Shock on the Way?

A sharp and sustained decline in the US dollar against other major currencies could trigger a recessionary shock for the global economy outside the United States, according to a BofA Securities report. The analysis warns that while some economies may withstand a weaker dollar, most developed nations could face slowed growth and deflationary pressures. Global financial markets could also experience disruption if confidence in the dollar falls abruptly.

What Are The Reasons Behind the Fall of the US Currency?

1. Slower Global Growth Response:
A weaker dollar may reduce US demand for foreign goods and investments, slowing economic growth in other countries.

2. Monetary Policy Responses Abroad:
Other nations may ease interest rates to counter deflationary pressures, which naturally limits how far the dollar can fall.

3. Decoupling from US Interest Rates:
Despite US rates staying in the 4.00–4.50% range, the dollar has weakened, indicating a loss of some safe-haven appeal.

4. Overstated Collapse Narrative:
Fundamentals like strong US growth and productivity advantages continue to support the dollar despite short-term weakness.

5. Global Financial Stability Concerns:
An abrupt, disorderly fall could disrupt trade, investment, and markets worldwide, making orderly currency movements critical.

Why Does It Matter? Weak Dollar Could Slow Global Growth

The report highlights that a sharply weaker dollar is likely to slow growth in economies outside the US, creating deflationary pressures. This could prompt other countries to respond with monetary easing, which would, in turn, act as a natural floor to limit further dollar depreciation.

“A large real depreciation of the dollar vis-a-vis other currencies would be a recessionary shock for the global economy ex-US. While some economies with strong momentum could withstand it, most developed economies would not emerge unscathed,” the report stated.

Major Risk? Disorderly Depreciation

BofA cautioned that a disorderly or abrupt fall in the dollar would benefit neither the US nor the rest of the world. Sudden loss of confidence in the dollar could disrupt trade, investment, and financial markets, threatening global financial stability.

Changing Dollar Dynamics

The report also notes a decoupling between the dollar and US interest rates. Despite US rates remaining largely in the 4.00–4.50% range, the dollar has weakened, while stock markets continue to hit new highs. This indicates that the dollar may be losing some of its traditional safe-haven appeal amid US-specific policy risks.

Fundamentals Remain Supportive

BofA added that the narrative of a collapsing dollar is overstated. The US continues to enjoy strong growth and productivity advantages, which have historically supported a strong dollar and allowed the financing of large fiscal and current account deficits.

While modest further depreciation of the dollar may occur, the report warns that a large real decline could have severe consequences for the global economy, underscoring the importance of orderly currency movements for financial stability.

(This article has agency inputs)

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