Dollar pressure

Something fundamental changed on liberation day in April. An investment in a foreign currency is necessarily attached to the return an investor can obtain in that curency. If the country behind the curency is considered safe, the interest rate attached is lower than other countries that are perceived as riskier; perhaps more debt, more inflation or more politically unstable. Among stable countries, interest rate diferentials, typically explain a big percentage of currency pair behavior. If you look at the chart below, you will see that rates differential had a very high correlation with the Euro/dollar exchange rate. Until trade tariffs were announced and perhaps when the currency market and the bond market realized that the U.S. will have a more nationalistic approach, with higher debts, and a more aggressive policy with its partners. And then, despite having a positive and growing rate differential between the a United States and Europe, the dollar started its weakening move. In the aftermath of the Great Financial Crisis, the dollar was certainly weaker than today against the Euro, and that was mostly due to the huge expansion of the Fed’s balance sheet. This time, it seems logical to explain the dollar weakness to the fiscal pressure the government is applying to the country’s finances. Since July 3rd when the OBBB was approved, the debt has increased $480Bn, probably because it was waiting for the debt ceiling to be raised. And the irony is that due to tariff revenue, the July budget turned into a surplus. But this trend is unsustainable. That’s why you see bitcoin and gold trading higher. And you’ll likely see official rates down in the US, in an attempt to lower the cost of debt and lift pressure from the curency. But the trust on the U.S. economy has been damaged. Regain it will be costly.

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