George Saravelos is Global Head of FX Research at Deutsche Bank is out with a striking note today, highlighting the problems with the US dollar, deficits and government policy. The note certainly resonates with US 30-year yields touching off 5% today.
They see the current account deficit continuing to rise.
"The significance of this conclusion cannot be over-estimated. We have been arguing over the last few months that the market is reducing its willingness to fund US twin deficits," Saravelos writes. "We worry this is brewing a major problem for the dollar and potentially the US bond market too."
It's tough to call a tipping point in this relationship but at some point the US will face a reckoning.
"For foreigners to continue financing US debt one thing needs to happen: the non-dollar price of US Treasuries needs to decline, either via currency depreciation or a drop in the price of the bonds. The problem for the latter is that it makes US debt dynamics even worse so is not sustainable. We are ultimately left with the only solution to this problem being dollar weakness."Saravelos believes this is already unfolding as inflows to the US are slowing and that there is an emerging breakdown in the dynamic between USD/JPY and yields.
To sum it all up, as Secretary Bessent alluded to himself, the US cannot be asking of the rest of the world to reduce its imbalance with America if the US is not willing to reduce its own. The risk is the rest of the world forces the correction upon the US in a disorderly way. This article was written by Adam Button at www.forexlive.com. Read More Details
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