USD Faces Pressure Amid Growing US Deficit Concerns – ING

USD Under Pressure Amid Growing Concerns Over US Deficit and Tax Bill Impact

The US dollar (USD) faces increasing pressure as concerns mount over the potential deficit impact of the US tax bill. The ongoing developments surrounding the tax reform and the looming vote in the House have fueled worries, resulting in a sell-off across US equities and bonds. The broader market remains uncertain, with investors closely monitoring the latest signs of fiscal policy shifts and the outcomes of the G7 finance ministers’ summit.

Concerns Over Deficit Impact of US Tax Bill
The House is pushing for a vote on the revised US tax bill before the Memorial Day recess, which includes provisions aimed at easing the bill’s impact on moderate Republicans. These revisions include increased tax deductions and expedited Medicaid cuts. However, fears have intensified this week regarding the bill’s potential to exacerbate the national deficit, contributing to renewed selling pressure in US financial markets.

Market Reaction to Weak Treasury Auctions and Widening Spreads
A weaker-than-expected 20-year Treasury auction, along with a widening 10-year US Treasury (UST)-Secured Overnight Financing Rate (SOFR) spread, further pressured US assets, signaling growing concerns among investors. The stress on Treasuries, in particular, is seen as a possible catalyst for a shift in US policy, with the markets keenly watching for any potential rethink in Washington.

G7 Summit and Potential Trade Relief for the USD
Despite the current focus on the US tax bill and deficit fears, markets are still looking to the G7 finance ministers' summit for any positive headlines, particularly regarding easing trade tensions. Any constructive developments on trade could offer temporary relief to the USD. However, the overall outlook for the greenback remains uncertain, with the potential for continued downside risks if fiscal concerns persist.

The combination of fiscal uncertainty, market volatility, and geopolitical concerns continues to weigh heavily on the USD, leaving traders and investors on edge as they await further developments from both the US and global markets.