---
title: "Can a strong dollar supported by fiscal stimulus last long?"
type: "News"
locale: "en"
url: "https://longbridge.com/en/news/219651121.md"
description: "Bank of America believes that the strength of the US dollar is unsustainable. Firstly, the market has already priced in the impact of Trump's policies in advance, and there are still uncertainties regarding the specific implementation of these policies. Secondly, the likelihood of the US further expanding its fiscal deficit relative to the Eurozone is low. Finally, even if the US continues to ease fiscal policy, concerns about the independence of the Federal Reserve and market pricing of debt risks may make it difficult for the dollar's strength to be sustained"
datetime: "2024-11-14T07:50:07.000Z"
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  - [zh-HK](https://longbridge.com/zh-HK/news/219651121.md)
---

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# Can a strong dollar supported by fiscal stimulus last long?

The strong dollar is impacting commodities and non-US currencies, but Bank of America believes that a strong dollar driven by fiscal stimulus won't last long.

On November 13, Bank of America foreign exchange strategist Athanasios Vamvakidis and his team released a report stating that **part of the reason for the strong dollar is that the US fiscal policy is more accommodative than that of other G10 countries. This year, the US has further relaxed its fiscal policy, and policies such as tax cuts following Trump's inauguration may temporarily boost the dollar, but in the long run, this strength is unsustainable.**

**There are three reasons why the strong dollar is unsustainable: First,** **the market has already priced in the effects of Trump's policies, and there are uncertainties regarding the specific implementation of these policies;** **second, the likelihood of the US further expanding its fiscal deficit relative to the Eurozone is low;**

**Finally, even if the US continues to relax fiscal policy, factors such as the resurgence of inflation in the US, market concerns about the independence of the Federal Reserve, and market pricing of the rapidly deteriorating debt risk premium in the US may make it difficult for the strong dollar to persist.**

Currently, the real effective exchange rate of the dollar has returned to historical highs. As of the time of writing, the dollar index is up 0.2% at 106.69.

## **Fiscal Easing Drives Strong Dollar**

Compared to other G10 countries, especially the Eurozone, the US economy has performed better—this superior performance has continued since the pandemic, leading to the so-called "American exceptionalism," which is a viewpoint that dollar bulls typically rely on.

This year, the US has further relaxed its fiscal policy, with the actual and structural deficits of the US government being at the highest levels among G10 countries.

 Undoubtedly, this may continue to support the dollar in the short term.

**However, Bank of America believes that this superior performance of the US is at least partially due to the high fiscal deficit of the federal government. If this is indeed the case, then "American exceptionalism" may not be sustainable, which correspondingly means that the support for the dollar may weaken in the long run.**

## **Why is the Strong Dollar Unsustainable?**

Why is the strong dollar unsustainable? Bank of America states that there are three reasons:

**First, Bank of America refutes the notion that the tax cuts and tariff policies implemented after Trump's inauguration will strengthen the dollar and support "American exceptionalism." Bank of America argues that while this may support the dollar in the short term, it does not bode well for the long-term outlook of the dollar.** The reason is that the fiscal policy stance of the Trump administration remains unknown. Although Trump has promised tax cuts and spending reductions, the market has already priced in the inflation impact. Furthermore, fiscal policy may become more accommodative due to tax cuts, but it could also tighten due to spending cuts.

**Secondly, Bank of America believes that the likelihood of the U.S. further expanding its fiscal deficit is low compared to the Eurozone.**

Bank of America observed that the U.S. structural deficit was only higher than that of the Eurozone during the global financial crisis and the pandemic. Historically, the likelihood of the U.S. further expanding fiscal stimulus compared to the Eurozone is low. If the U.S. cuts spending or the EU provides more fiscal flexibility policies, this gap will narrow.

**Finally, Bank of America points out that even if the U.S. continues to loosen fiscal policy, the strength of the dollar is not sustainable:**

First, the U.S. economy may overheat and face the risk of rising inflation again; second, the Federal Reserve will have to turn hawkish, and the market may price in the risk to the Fed's independence, especially as the relationship between Trump and Powell becomes increasingly tense, with Powell's term ending in mid-2026; third, the market will ultimately have to price in the rapidly deteriorating debt risk premium of the U.S.

Therefore, Bank of America believes that any further unnecessary fiscal stimulus can only make the dollar a fleeting phenomenon

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