U.S. Dollar Slumps as Historic Hurricane Season Clips Growth and Rate Forecasts

A $300 billion hit from Hurricanes Harvey and Irma is likely to affect jobs, growth and inflation in the months ahead.

Author:: Martin Baccardax
Publish date:: Sep 8, 2017 8:19 AM EDT

The U.S. dollar is hovering near a two-and-a-half year low Friday as investors continue to track the patch of Hurricane Irma as they count the ultimate cost of this year's historic storm season on the world's biggest economy.

The dollar index, which measures the greenback's strength against a basket of six global currencies, slipped to 91.09 in European trading, the lowest level since January 2015, as investors trimmed bets of a December rate hike from the U.S. Federal Reserve owing to the economic impact of both Harvey, which may have caused as much as $180 billion in damage in Texas and Louisiana, and Irma, which is barrelling towards the South Florida coats carrying windspeeds of more than 185 miles per hour.

Fed Funds Futures are now pricing in just a 26% chance of another rate hike this year, that's down from 36% last week and 43% in early August, according to data on the CME Group website.

An early indication of Harvey's impact, beyond the hit it's had on U.S. oil production, may have come with Thursday's jobless claims data, which showed a 62,000 surge in the number of Americans seeking unemployment benefits, taking the overall total to a two-year high of just under 300,000. Most of that gain, however, was the result of applications in Texas, which rose by nearly 52,000.

Calculating the end cost of Harvey's damage is difficult, however, given that near-term loses to the economy are often offset by a medium-term boost to growth and as government support programs kick-in and private investment in rebuilding accelerates.

Aberdeen Asset Management economist Paul Diggle estimates Harvey could trim as much as 0.3 percentage points from third quarter GDP figures, while gas price spikes could add similar gains to benchmark inflation figures.

"Later, the rebuilding effort could actually be a larger but much more diffused boost to demand and therefore the level of GDP," he said in a client note. "Whether there is a lasting impact on GDP after this down-then-up pattern depends on the extent of permanent damage to infrastructure, which as things stand appears material."

That theory was largely supported in a recent survey by the Institute for Supply Management, which found that "data indicating that the effect on production, new orders, and employment will be relatively minimal" even as it acknowledged a "significant" human and corporate impact.

"The survey found that two-thirds (67 percent) of responding supply managers believe input materials pricing will be at least somewhat negatively impacted over the next three months with greater than one-quarter (27 percent) expecting prices to be negatively or very negatively impacted," the ISM said. "Relatedly, a majority (56 percent) of respondents believe supplier deliveries will be at least somewhat negatively impacted over the next three months with nearly one-fifth (19 percent) expecting deliveries to be negatively or very negatively impacted."

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