Dollar Bears Face Short-Term Angst From U.S. Stimulus Impasse

(Bloomberg) -- The political stalemate in the U.S. over additional fiscal stimulus has raised the prospect of a pause in the dollar’s slump.

Republicans and Democrats are at least $1 trillion apart on spending plans and it may be weeks before they enact a compromise to bolster the U.S. economy. That could make investors globally less willing to embrace risk, supporting the dollar as a haven, according to Barclays Plc and Saxo Bank A/S.

“As long as the deadlock persists, the U.S. dollar will have some legs,” Kay Van-Petersen, global macro strategist at Saxo Capital Markets Pte. in Singapore, said in an interview Monday. Once fresh stimulus is passed, especially if it’s more than anticipated, weakness will likely return, he said.

The Bloomberg Dollar Spot Index is down 9.6% from a March peak during the worst of the panic over the pandemic. Some investors argue money creation amid huge U.S. stimulus injections will lead to inflation and a prolonged period of greenback weakness. At the same time, others have warned that betting against the dollar is becoming a crowded trade that’s due for a squeeze.

Barclays strategists including Ashish Agrawal wrote in a note that they expect some “near-term” support for the dollar from the possibility of a further delay to stimulus, to the extent that could impact global risk sentiment.

Economists argue that a sharp drop-off in government spending imperils the recovery from last quarter’s historic collapse in U.S. gross domestic product.

For Brown Brothers Harriman & Co., that actually points to more dollar weakness from the fiscal holdup. A stimulus package is unlikely until September, if at all, signaling third-quarter U.S. economic and currency underperformance, Win Thin, global head of currency strategy, said in a note.

Many investors continue to expect the dollar to drop over the longer term. A weaker greenback was the favorite trade for 36% of the fund managers surveyed this month by Bank of America, and hedge fund positioning data show bets against the currency continue to mount.

©2020 Bloomberg L.P.