The hard data from the US does not yet show any real signs of a drastic economic slowdown as a result of the new US administration’s erratic trade and economic policy, although growth in the first quarter surprised on the downside with a contraction, fueling recession fears. At least the purchasing managers’ indices have recovered after the slump at the beginning of the year and are back in comfortable expansionary territory in May, both for the manufacturing and service sectors, Commerzbank’s FX analyst Antje Praefcke notes.
New trouble for the USD is looming from the US budget
“Does this mean that the recession fears were exaggerated and the dollar has one less problem to worry about? Not so fast, please. Our economists have always assumed that a recession in the US can be avoided. In addition, the market has already scaled back its recession fears based on the still solid US data of recent weeks and months. Nevertheless, the effects of the tariffs are likely to become visible in the second half of the year, partly due to the 90-day suspension. So the problem has not been solved, but merely put on the back burner.”
“However, new trouble for the USD is looming from another side. I already touched on this topic on Tuesday: the US budget. Trump’s tax bill, which has been controversially debated even within his own party, has been passed by the House of Representatives and is now going to the Senate. Among other things, it aims to make the tax cuts introduced by Trump permanent. However, the financing for this is also shaky, and it can be assumed that the budget deficit will continue to swell.”
“Perhaps the issue will now become more pressing as it is being discussed more in public. I am curious to see when the market will realize that this is the next major (structural) burden on the dollar.”