US Dollar: Supportive fundamentals offset deficit worries – Rabobank

Rabobank’s FX Strategy team argues that reduced fears of political interference at the Federal Reserve and evidence of renewed safe-haven demand support the Dollar. The bank notes that concerns over the US budget deficit and treasury market stresses could weigh on the Dollar over the medium term, but concludes that last year’s Dollar debasement fears were exaggerated.

Fed credibility and safe-haven dynamics

"Diminished fears about political interference on the Fed is a supportive factor for the USD. In addition, at the start of the Gulf war, strong demand for the USD undermined last year’s claims that the USD’s had lost at least part of its safe haven value. In our view the USD’s safe haven appeal is linked to its embedded position in global payments systems, which could take decades to shake."

"Reduced concerns over the credibility of the greenback should allow it more opportunity to benefit from the US’s robust economic growth performance. In addition, in our view, the stresses that the EUR could face in the coming months could support a preference for long USD positions."

"There is still a risk that concerns related to the US’s unwieldly budget deficit could weigh on the USD over the medium-term. The US budget deficit at over 6% of GDP is wider than that of France. However, for decades the US has benefitted from the ‘exorbitant privilege’ of being able to fund its debt at relatively low yields, due to strong demand for its debt."

"There are signs that this ‘privilege’ has slipped. These manifest in changing yield spreads vs. other bond markets and signs of stress in the treasury market. Indeed, there have been notable incidences of uncomfortable selloffs in the US treasury market over the past 19 months or so."

"Either way, last year’s dollar debasement fears appear exaggerated."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)