Although hard economic data from the United States has yet to reflect a clear slowdown due to the unpredictable trade and fiscal policies of the new administration, mounting warning signs suggest increasing risk to the U.S. dollar. While the first quarter brought a surprising decline in GDP—sparking recession fears—May’s PMI readings for both manufacturing and services showed a solid rebound, returning to expansion territory. So, is the recession threat overstated, and can the dollar breathe a sigh of relief?
A Reprieve, Not a Resolution
The belief that the U.S. economy might avoid recession has been bolstered by strong macroeconomic figures in recent weeks. These reports have helped ease market anxiety. However, the effects of the newly imposed tariffs—currently suspended for 90 days—have yet to fully materialize and may only become apparent in the second half of the year. In that sense, the issue has not been resolved, merely postponed.
The Bigger Threat: Structural Fiscal Imbalance
A potentially more serious and longer-term risk is emerging: the state of U.S. public finances. The tax bill championed by President Trump and recently passed by the House of Representatives—now under debate in the Senate—includes permanent extensions of previous tax breaks. However, these tax cuts lack a sustainable funding mechanism, signaling a continued expansion of the already stretched federal deficit.
If this issue gains broader attention among the public and investors, it could become a significant burden on the dollar. Until now, markets have largely focused on short-term economic data and the Federal Reserve’s monetary policy. But as the U.S. fiscal outlook deteriorates, market participants may soon be forced to revise their expectations for the dollar.
A Question of Timing
The question is not if, but when the market will fully price in the risks associated with America’s worsening fiscal fundamentals. For now, short-term indicators may support the dollar, but structurally, the currency faces growing headwinds.
Author: Łukasz Zembik, OANDA TMS Brokers
Source: ceo.com.pl
Disclaimer: The information provided in this publication is for informational purposes only and does not constitute financial or investment advice. Readers should seek independent advice before acting on any information presented herein.
