US: Will the big dollar cave under the weight of deteriorating budget deficits? - NBF

As if tax cuts were not enough, the U.S. Congress opted in February to dispatch another dose of fiscal stimulus, this time by increasing spending caps, points out Krishen Rangasamy, Research Analyst at NBF.

Key Quotes

“As such, America’s budget deficit is now projected to soar next year past US$1 trillion or more than 5% of GDP. If history is any guide, the U.S. dollar, which has already lost 9% in trade-weighted terms since Trump became President, could continue to struggle. As today’s Hot Chart shows, the USD tends to be positively correlated to the budget balance.”

“One exception, however, was during the Reagan deficits of the 1980s which did not seem to put off foreign investors who continued to find U.S. assets attractive as Paul Volcker, the Fed Chairman at the time, pushed up the real fed funds rate past 5%. But this time is different because mild inflation and a significantly reduced natural rate of interest limit Jerome Powell’s scope in tightening monetary policy. The new Fed Chairman will also understand that a cheaper dollar is necessary to give the U.S. a chance of improving its trade balance and appease the White House.”