LIVE MARKETS-The dollar's fiscal frown

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THE DOLLAR'S FISCAL FROWN

We've got used to a world where the dollar "smiles", appreciating at times when the U.S. economy is doing well, also appreciating in "risk-off" environments thanks to safe-haven flows, while underperforming when things are in between.

But the current environment for the dollar and Treasuries, says Deutsche Bank's head of FX research George Saravelos, is one where the dollar frowns.

On the left hand side of his chart is the situation we're seeing on Monday, where investors are worried that the U.S. fiscal stance is too easy. That is leading to a combined drop in U.S. bonds and the dollar as the market worries about its appetite to fund America's deficits and rising financial stability risks

Ratings agency Moody's, late on Friday, downgraded the U.S. underscoring worries about its fiscal health as President Donald Trump's sweeping tax-cut bill works its way through the system.

On the right hand side of the frown, says Saravelos, is a U.S. fiscal stance that tightens too quickly, "closing the deficit sharply but forcing the U.S. into a recession and a deep Fed easing cycle."

That causes the dollar to drop and bonds to rally at the same time "a more conventional world".

In the middle is a soft landing, where the dollar appreciates.

(Alun John)

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