LIVE MARKETS-The path of least resistance to tackle the US twin deficits

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THE PATH OF LEAST RESISTANCE TO TACKLE THE US TWIN DEFICITS

U.S. President Donald Trump reiterated yesterday his criticism of Federal Reserve Chair Jerome Powell for not cutting interest rates.

Lower interest payments would ease the debt burden for the U.S. Treasury, and a weaker dollar could help reduce the trade deficit. However, markets remain uncertain about the broader implications of such a policy shift.

George Saravelos, global head of forex research at Deutsche Bank, outlines what he sees as the “path of least resistance” for the U.S. administration to tackle its 'twin deficits'.

The U.S. strategy could involve a reallocation of Treasury ownership from foreign to domestic investors, increased domestic financial repression, a major push for dollar stablecoins, growing pressure on the Fed to cut rates, and a weaker dollar.

The aim is to reduce reliance on foreign buyers of U.S. bonds and increase domestic absorption of U.S. duration risk, effectively creating fiscal space to absorb persistent deficits

He highlights ongoing discussions around regulatory changes on banks’ leverage ratio requirements and potential policies to mandate greater long-duration purchases by pension funds.

“The American private sector balance sheet is strong, with high cash holdings and plenty of potential to absorb sovereign credit risk,” Saravelos says.

He argues that advocacy for dollar-pegged stablecoins backed by short-dated U.S. Treasury bills should be viewed in the context of accommodating the shift in demand preference by shortening foreigners' duration exposure.

(Stefano Rebaudo)

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