The return of the twin deficit? – Commerzbank

Source Fxstreet

You have to look long and hard to find any arguments in favor of the dollar at the moment. And I fear that, in all the turmoil, another structurally negative constellation could ultimately emerge, one that the 'old hands' among us in the market probably still remember: the US twin deficit. After the dot-com bubble burst in the early 2000s, the dollar came under pressure for years as markets took a very critical view of the large budget deficit combined with the large trade deficit in the US and punished the dollar, Commerzbank's FX analyst Antje Praefcke notes.

The debate about the US budget is gaining momentum

"I fear that the market could soon realize that we could be facing such a situation again. On the one hand, most of the tariffs announced since 'Liberation Day' have been suspended for the time being, so no reduction in US imports is to be expected. At the same time, however, the US continues to consume a lot of foreign goods. A reduction in the US trade deficit, especially on a sustainable basis, therefore seems unlikely at this point in time."

"At the same time, the debate about the US budget is gaining momentum. Tariffs will not be nearly enough to plug the holes in the budget. Savings in most areas of the budget are difficult to implement. At the same time, there are fears that, with 10-year US Treasury yields now at 4.5%, it is inevitable that interest payments will significantly increase in the budget, making budget consolidation even more difficult. The market could therefore increasingly question the US's debt sustainability."

"If we really do fall back to the beginning of the 2000s and the market runs with this new old topic, the dollar could face a prolonged period of weakness, in part due to the 'twin deficit.' Therefore, I will pay attention to whether I read and notice this word more often from now on, even if I almost couldn't hear it any more back then."

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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