Dollar Bears May Want to Ease Off
25/08/09 22:08
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UBS economists wrote that the White House lowered its FY09 deficit forecast to $1.580 trillion (11.2% of GDP) from $1.841 trillion (12.9%). However, longer-term deficit projections were revised up by roughly $2 trillion over the next ten years. The US deficit remains a longer-term concern for the dollar, though we think it is better for dollar bears to wait until later in the year.
The bulk of the downward revision to the Office of Management and Budget (OMB) FY09 deficit forecast reflected the removal of a $250 billion placeholder for further TARP-type legislation that was included in its earlier projections. As noted, the OMB significantly raised its out-year deficits. According to the OMB, the changes to the longer-term deficit are primarily driven by changes in its economic assumptions.
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UBS economists wrote that the White House lowered its FY09 deficit forecast to $1.580 trillion (11.2% of GDP) from $1.841 trillion (12.9%). However, longer-term deficit projections were revised up by roughly $2 trillion over the next ten years. The US deficit remains a longer-term concern for the dollar, though we think it is better for dollar bears to wait until later in the year.
The bulk of the downward revision to the Office of Management and Budget (OMB) FY09 deficit forecast reflected the removal of a $250 billion placeholder for further TARP-type legislation that was included in its earlier projections. As noted, the OMB significantly raised its out-year deficits. According to the OMB, the changes to the longer-term deficit are primarily driven by changes in its economic assumptions.
Budget deficits have abounded in the US over the past 30 years and the dollar has largely reacted to shifts in the deficit, with the notable exception of the 1980s. The latest US Treasury data shows that the federal budget deficit is 8.9% of nominal GDP (calculated by summing the last 12 months of the US Treasury Federal budget debt summary and taking that as a % of the latest nominal GDP), versus the April 2007 high of -1.0%.
Despite the White House's lowered deficit forecast for FY09, longer-term increasing budget deficits will likely weigh on the dollar. But at the current juncture we remain cautious about the rebound in global asset markets and favour currencies such as the dollar that will benefit from a potential return of risk aversion in the near-term. We refrain from chasing dollar weakness at the current juncture and think that long-term dollar bears are likely to get better levels to sell the dollar later in the year. We also keep in mind that at least for the next year or so, the US will not likely be alone in running sizable budget deficits.
This may lend itself to some surprise moves and trends over the coming months. The market often moves to the blind side. On that note, my concern over the risk aversion play is that many financial pundits are looking for a risk averse move in Sept into Q4, which often makes it less likely to occur.
Ref: UBS, Reuters