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Dollar to Weaken Further This Year Amid Wider Current Account Deficit

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Tuesday, 13 March 2018 08:11 AM Current | Bio | Archive

We have economic headlines today with consumer price inflation (CPI) numbers due.

Investors have a heightened sense of awareness about inflation. This means that any inflation measure has today a little more attention than in the recent past.

U.S. consumer price inflation is used to calculate inflation linked security yields in the U.S. and revealed preference suggests that it is the most watched inflation measure in the financial markets.

However, it is not the measure that the Federal Reserve considers when setting monetary policy.

This matters because some of the peculiarities of the consumer price inflation (CPI) data will start to raise this inflation measure, though without the same impact on other inflation measures.

U.S. consumer price inflation (CPI) has a large component of non-market prices in it, that is to say, a reasonable part of the CPI basket is made up of prices that people do not actually pay in the real world. Some of these prices are going to add to inflation over the course of this year, notwithstanding they may not to be adding them right at this moment.

Anyway, the CPI is expected to rise in February at a somewhat more moderated clip than in January when the month-over-month CPI increased by 0.5 percent. Airfares and the Fed's favorite 'transient' factor of cell phone services posted yet another monthly fall.

Maybe it could be helpful to recall investors that ‘if’ U.S. inflation hits that ‘still’ elusive level of 2 percent as measured by the annual change in the price index for personal consumption expenditures, or PCE, which is of course not the CPI, Treasury Inflation Protected Securities (TIPS) could score solid gains this year, producing higher returns than regular U.S. government bonds.

Today we also have the National Federation of Independent Business (NFIB) Small Business Optimism Index that is due, but this is of course a business sentiment survey and should, as always, be taken with extreme caution.

Meanwhile, the U.S. budget deficit in February came in at $215 billion, which is its largest level in six years. Fiscal income dropped to $156 billion, down 9 percent from a year earlier, while spending rose 2 percent to $371 billion.

There have, of course, been tax cuts in the United States and those that believe growth will leap up to right more revenue might argue that growth had not yet time to appear.

However, there are also some suggestions that attempts to close tax loopholes are less effective than had been hoped for.

The budget deficit has implications for the current account deficit.

In my view, part of the fiscal stimulus is likely to find its way out of the United States and to be spent on imports, which will widen the U.S. current account deficit, and is one reason why I feel that the dollar is likely to decline further this year.

Besides all that, a certain amount of politics is intruding into the world of economics.

In the United Kingdom, Prime Minister May has accused Russia of being responsible for a chemical weapons’ attack on the United Kingdom.

Secretary of State Rex Tillerson has said that the nerve agent attack with the military-grade Novichok nerve agent that is produced by Russia on former spy Sergei Skripal and his daughter “clearly came from Russia” and will have consequences.

Russian President Putin has been given until midnight today (UK time) to respond before the British government set out a range of counter measures. Given that Russian capital has been invested in the UK, this could have some market relevance.

It is possible that economic sanctions against Russia may be sought or article 4 of the NATO treaty used to call a special meeting.

Meanwhile in the United States, today, we have a special election in Pennsylvania's 18th congressional district.

With democrat voter turnout having increased in other recent elections, opinion polls are suggesting that the Republicans might lose the seat, which previously would have been considered as a safe seat for them.

This doesn’t matter in the sense of changing the balance of power in the House of Representatives.

Nevertheless, it does matter for the markets if investors see that this is a foretaste of what might happen in the November mid-term elections.      

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
In my view, part of the fiscal stimulus is likely to find its way out of the United States and to be spent on imports, which will widen the U.S. current account deficit, and is one reason why I feel that the dollar is likely to decline further this year.
dollar, weak, current, account, deficit
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2018-11-13
Tuesday, 13 March 2018 08:11 AM
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