The dollar has ‘defied expectations’ this year, but the pause in the Treasury bond market sell-off has prompted a reversal. The trade-weighted dollar has fallen 1.2% since the start of this month.
The outlook is finely balanced: economic outperformance needs to be weighed against the ballooning US twin deficits.
The deficit in goods & services widened to a record $71.1bn in February. Attention has focussed on China in recent years, but the US goods deficit vis-à-vis the Eurozone widened to a record in the past year. The much greater fiscal stimulus vis-à-vis Europe will exacerbate a deteriorating US trade deficit in 2021. The Biden administration is pushing for an outsized increase in spending on health and education.
The coronavirus pandemic has also triggered a sharp rise in the goods deficit with Taiwan, as IT demand surged. President Biden will have his work cut out reshoring important, strategic sectors of the economy, necessary if the dollar is to hold on this year’s gains.
Summary
- Strength of US economy pushes deficit wider
- Twin deficits balloon
- This may start to be a risk for the dollar later this year
