US Dollar draws support from fundamentals despite deficit concerns – Rabobank

Concerns about the US budget deficit and strains in the Treasury market could put pressure on the Dollar over the medium term, according to Rabobank’s FX Strategy team. For now, however, the team sees support for the currency from easing fears of political interference at the Federal Reserve and signs of a revival in safe-haven demand. In the bank’s assessment, last year’s fears of Dollar debasement were overstated.

Fed credibility and safe-haven demand underpin the Dollar

"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."

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"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.)