Synopsis:
MUFG highlights mounting concerns over the US fiscal position, following a sobering update from Moody’s, which suggests further fiscal weakening—even under optimistic scenarios. The report, along with anticipated federal job losses and falling consumer confidence, reinforces the bank’s bearish outlook for the USD beyond any short-term rebounds.
Key Points:
1️⃣ Moody’s Warns on US Fiscal Deterioration 📉
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Moody’s noted the fiscal position has worsened since it downgraded the US sovereign outlook in 2023.
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Even under “very favourable” conditions, fiscal weakening is likely to persist.
2️⃣ DOGE's Role Adds Policy Uncertainty 🏛️❓
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The Department of Governor Efficiency (DOGE) is central to executing Trump’s tax plans while avoiding a spike in long-term yields.
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Markets remain unsure if DOGE can implement enough spending discipline or offsetting revenue measures, introducing further uncertainty.
3️⃣ Job Losses to Undermine Consumption 💼🛑
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Up to 300k job losses expected from federal layoffs and buyouts, a significant hit to employment and consumer confidence.
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This is likely to dampen consumer spending, contributing to slower US growth in H2.
4️⃣ Implications for the USD 💵⬇️
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Fiscal risks and consumer retrenchment create a negative backdrop for the USD.
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While short-term recoveries are possible, the medium-term trend remains bearish, especially as the Fed will likely prioritize growth risks.
Conclusion:
MUFG sees rising fiscal risk and labor market fragility as key factors undermining the US dollar over the medium term. Even if the USD experiences short-lived rebounds, the deteriorating fiscal outlook, slower consumer spending, and increased policy uncertainty—especially surrounding DOGE—will weigh on the greenback as the year progresses.
