Is the issue of the twin deficits starting to haunt the US dollar?
This is something that markets have kept in their back pocket since the start of the year. But make no mistake, it's one that continues to linger and will matter when it matters. With the dollar unable to find a bid again on a day where risk sentiment wanes, it begs the question: Is this starting to matter now?
The Japanese yen and Swiss franc are the two major currencies that are well bid on the day as they are the usual suspects when investors flock to haven assets. The US dollar is one of those as well but what separates the other two from the greenback is that they run current account surpluses while the US runs a deficit.
Although Trump has attempted to rectify that, it isn't something that will go away in a span of a year - or even a few years for that matter. This is likely something that will persist for a much longer time and unless there is a major breakthrough to narrow the deficits - which there still isn't - then this will continue to be a plague for the dollar in the years to come.
Add to the fact that the large deficit here only causes higher borrowing costs for the Trump administration, and that makes it tougher to ignore this over time.
With the US midterms also just on the horizon, there's a couple of reasons to be more bearish (or a little less bullish) about the dollar as we close out the year. Put aside the fact that year-end tends to see demand for dollar funding, the lack of haven appeal and stretched positioning is making for a case that the greenback may start to lose out against other major currencies as long as global markets continue to remain uneasy by ongoing geopolitical tensions and continued threats to the bull market in equities.
