Opinions Joost Derks
And there goes the US dollar
US President Joe Biden addressed Congress for the first time on Wednesday evening. He focused on infrastructure and combating inequality, among other things, in which he wants to invest heavily. Those huge expenditures are increasingly impacting the dollar.
Joe Biden was able to celebrate this week that it has been 100 days since he moved into the White House. Usually, this period gives a good idea of what a president wants to achieve during his reign. That is not the case for Biden, however, as his early days are all about dealing with the pandemic.
In any case, his promise to get at least 100 million vaccinations in his first 200 days has been more than fulfilled. Thanks to that bold approach, the focus could shift to his other plans in the coming months. The common thread in this is that Biden mainly wants to spend money. Lots of money.
2.000.000.000.000 dollar
In March, Biden already unveiled a major plan to significantly refurbish the infrastructure. He wants to free up $2 trillion to clear overdue maintenance on 30.000 miles of roads and 10.000 bridges. The digital infrastructure must also be further expanded and substantial investments are also being made in the transition to a green economy, with electricity from sustainable sources.
If Biden manages to get his plan through Congress — where his Democratic party has a tiny majority — the $2 trillion dollars will be spent over the next 8 years. Initially, the deployment of the infrastructure initiative led to a somewhat higher dollar. The large spending can fuel both economic growth and inflation. However, the US currency has been under increasing pressure in recent weeks.
Bond market is ahead
An important reason for the dollar weakness is that interest rates on the US bond market have come to a halt. With an increase from 0,9% at the end of last year to more than 1,6%, investors have already priced in a significant acceleration in economic growth this year. That explains why the positive unemployment and growth figures are hardly triggering a reaction in the bond market.
Another factor putting pressure on the dollar is the growing budget deficit. Biden did calculate that the infrastructure investments could be recouped within 15 years with higher tax revenues. But those revenues are quite uncertain, while the expenses are largely fixed once the plan has been approved. Plus, it looks like Biden is going to spend a lot more money.
Another new investment plan
This week he announced that he will invest heavily in childcare, education and longer paid leave for parents. He wants to spend $1 trillion on this so-called American Families Plan, plus $800 billion in tax credits. In this case, too, it is the intention that the investment will be recouped in 15 years.
But currency markets are increasingly looking at the cost of Biden's ambitious plans. Experience shows that the currency of a country with a 'double deficit' in both the budget and the current trade account will sooner or later have a hard time.
Joost Derks
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