Commodities | Fiscal Policy | Monetary Policy & Inflation | US
This year’s dollar decline has resumed. Having paused during election season, the downtrend restarted as the country entered the final stage of vote tallying and certification (Chart 1). This makes sense for several reasons: 1) the likely future path of US fiscal policy; 2) Fed resistance to higher real interest rates; and 3) the dollar’s weak fundamentals, which the Covid slump has highlighted. As I have written in my series of articles prior, I believe the dollar has begun a large decline of 10% or more in broad, trade-weighted terms. Further, over longer time horizons, a much larger decline is not only possible, but likely.
While the presidency may switch parties and adopt a new rhetoric and tone, it will do so with a razor-thin margin implying no strong policy mandate. In Congress, the House appears more evenly split than before, and the Republicans appear to have retained control of the Senate. This is a recipe for the sort of fiscal policy gridlock that has generally characterised the US federal government for decades. Meaningful entitlement or defence-spending reform are almost certainly off the table. As for taxes, Joe Biden (or eventually Kamala Harris) might push in this direction as president, only to meet fierce resistance in both houses of Congress, especially the Senate. As such, the US will continue to run chronic fiscal deficits.
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