- The US budget deficit is expected to grow sharply over the next decade, according to the US Congressional Budget Office (CBO).
- Westpac Bank says that may explain why the US dollar has been weak recently despite hawkish commentary from the US Federal Reserve.
The US government is currently spending more than it earns.
As seen in the chart below from Westpac Bank, that trend that looks set to continue if the new projections from the US Congressional Budget Office (CBO) are anything to go by.
“[The CBO] now sees a 2018 deficit of $US804 billion, $US242 billion larger than in the June 2017 projections. This is around 4.2% of GDP,” says Sean Callow, Senior Currency Strategist at Westpac.
“The CBO estimates that US deficits over 2018-2027 will be $US1.6 trillion wider than in the June report, with policy changes adding $US2.7 trillion to deficits but faster growth contributing $US1.1 trillion to the [budget] bottom line.”
Despite the expectation of even larger budget deficits, Callow notes US 10-year treasury note yields haven’t risen in response, something he puts down to safe-haven buying due to recent volatility in stocks.
However, while that has seen the 10-year yield pullback from 2.95% in February to 2.82% today, Callow says there’s no guarantee that recent demand for US bonds will persist, especially for offshore investors.
“It remains to be seen how foreign investors respond,” Callow says. “Wire ‘sources’ claim China has been switching to euros but official data is released with a long lag and plenty of caveats.”
Callow says the expected deterioration in the US budget position may explain why the US dollar has been weak recently despite hawkish commentary and forecasts from the US Federal Reserve.
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