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Budget Deficits and the Weak Dollar

Feb 15, 2018

Describing the U.S dollar as slumping would not be doing justice to its current slide. Not only has the dollar already experienced significant depreciation, but if we are to believe TD Bank’s head of foreign-exchange strategy Mark McCormick, significant further downside remains. This is the central theme identified in Alexandria Arnold’s piece “Dollar Under Siege with U.S. Deficits Back on Wall Street’s Radar”. Already reaching 3-year lows, there are several factors that may contribute to weaken the greenback’s value further. McCormick believes that the dollar is currently overvalued by as much as 10% long term, representing significant potential downside.

Investors maintaining significant cash holdings in their portfolios are likely all too aware of the dollar’s woes. Having fallen 12% in value since the beginning of 2017, sizeable losses in purchasing power may be a growing reality. Partially to blame is a widening trade deficit, and an overall increase in the budget deficit. For the four-month period stretching from October 2017 to January 2018, the U.S budget deficit has increased by 11 percent on a year-over-year basis. While the U.S commonly maintains a trade deficit, it becomes increasingly concerning when analyzing changes in non-energy exports. US shale exports have been on the rise, distorting the overall current account balance. When removed from the equation, the widening deficit becomes disconcerting. This, however, may just be the tip of the iceberg. Recent Congressional spending increases of $300 billion, in concert with a $1.5 trillion tax cut, will flood an already cash rich economy seemingly putting the dollar in a more vulnerable position.

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