Deutsche Bank has been bullish on the US dollar since the start of the year and sees no reason to change course in light of three key drivers of US outperformance.
1) American budget deficits
The United States has adopted a budget deficit of 5-6% of GDP for the fifth year in a row and DB now calls the excessive spending a “grand coalition” between Republicans and Democrats and includes “the war deficit at full employment.” Compare that with falling spending in Europe and elsewhere and you have a looming budget problem, but in the meantime strong growth and a strong dollar.
2) The safe-haven status of the dollar
The dollar can escape high budget deficits because the domestic private sector fully finances public sector spending. Second, as the Fed maintains inflation credibility, this means Treasury rates will need to be higher. Finally, they tout the reserve status of the dollar, which seems invincible. They also note that there is nothing unusual about the US dollar and gold rallying at the same time.
3) Deflation in China
“Nowhere is dollar dominance more apparent than the continued upward pressure on USDCNY. Given China’s huge external surpluses, this indicates persistent capital flight and is entirely aligned with the combined rally in the gold and the dollar this year.”
Finally, they note that Japan’s threats of intervention “are not credible” because the weakness of the yen is fueled by flows into carry trades.
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