The U.S. economic outlook is better than many other countries, which has led to an unexpected recovery in the dollar exchange rate this year. Investment institutions originally expected that when the global economy generally rebounded, the U.S. dollar would show weakness, but the results were stronger rather than weaker. However, some institutions believe that the U.S. economy is relatively strong, which may lead to higher Inflation worries, so it will eventually be unfavorable to the dollar.
Since the beginning of January, the dollar has risen 2.5% against the major currencies, contrary to the view of some institutions predicting that the dollar will re-depreciate by 20% this year. This gap will be so large, mainly because the Biden administration proposed a $1.9 trillion bailout plan successfully implemented.
However, the huge bailout funds, coupled with the savings accumulated by households last year, will trigger “retaliatory” demand, causing inflationary concerns; in addition, the U.S. budget deficit and accumulated debt will also be expanded. A country’s inflation is high, and the government deficit increases, often unfavorable to the national currency. Therefore, some investment institutions to increase the size of the raw materials commodities, and will move funds to emerging stock markets to avoid the risk of higher U.S. inflation and the depreciation of the dollar.
The United States has not had a high inflation problem for 30 years, but many investment institutions believe that the situation may have changed due to a major expansion of government spending. Even left-leaning economist Summers is concerned that government spending expansion could send inflation soaring.
U.S. bond investors are betting that inflation will rise sharply in the short term, and then weaken. One of the theories advocating that there has been no high inflation in the past few decades is the lack of wage bargaining power of labor, global free trade, and technological advances to depress prices. But these factors are gradually losing strength, or even reversing.
Investors who are worried about inflation are concerned about government spending and the amount of debt raised. 2020 budget deficit is 14.9% of gross domestic product (GDP), the highest level since 1945; the Congressional Budget Office originally predicted that the ratio would drop to about 10% in 2021, but the new bailout plan will pull up the deficit again.
Some investment institutions believe that now the Fed’s purchase of public debt is no longer quantitative easing (QE) measures, but in the experiment of financing government debt, that is, from the Fed’s vault straight to the Treasury’s treasury.
During 2010-2014, the Fed bought about 40% of the government’s new bonds, and the ratio of outstanding bonds doubled to 18.6%. As for last year, the Fed’s debt purchases accounted for more than 55% of the government’s new debt issuance, and the ratio of outstanding debt increased from 13% to 22%. The treasury through the treasury, may make the United States fiscal spending unrestrained, easy to send difficult to collect. This operation can easily lead to higher inflation, which is negative for U.S. stocks, U.S. bonds and the U.S. dollar.
At the same Time, the increase in U.S. spending will drive imports and the current account deficit to increase. “Double deficit” synchronous expansion, not only weaken the U.S. economic strength, but also make the dollar more vulnerable.
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