Synopsis:

BofA contends that the USD’s strength, driven largely by US fiscal policy outperformance relative to G10 economies, particularly the Eurozone, is not sustainable long term. While further fiscal loosening could offer near-term USD support, this “US exceptionalism” is largely due to high fiscal deficits, which may not sustain the USD’s elevated position in real effective terms indefinitely.

Key Points:

• US Fiscal Loosening and Short-Term USD Support: Additional fiscal loosening could temporarily boost the USD, despite its high real effective exchange rate, providing USD bulls a short-term case.

• Outperformance Due to Fiscal Policy: BofA argues that US economic outperformance relative to G10, largely attributed to “US exceptionalism,” has been fueled by expansive fiscal deficits rather than intrinsic structural advantages.

• Sustainability Concerns: Since fiscal-driven growth may not last indefinitely, this suggests diminishing USD support in the long term as other G10 economies with tighter fiscal policies may catch up or outperform.

Conclusion:

BofA sees current fiscal-driven USD strength as short-lived, with the dollar’s elevated position potentially unsustainable as US fiscal deficits continue to drive, but ultimately limit, the case for “US exceptionalism.” This view implies that USD support may weaken over the long term, challenging USD bulls reliant on fiscal expansion as a continued driver.