UBS Says Dollar to ‘Roll Over’ Amid Trump Spending, Tax Cuts

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  • Weaker currency may help boost metals, gold, wealth unit says
  • ‘We believe the dollar has actually peaked,’ Wayne Gordon says

UBS' Gordon: Commodity Price Gains to Extend Into 2017

The dollar has peaked and will probably decline this year under President Donald Trump, according to UBS Group AG’s wealth-management unit, which expects the currency’s impending weakness will help to benefit prices of base and precious metals.

“The more debt that Donald Trump promises through higher infrastructure and lower tax and tax cuts tends to lead itself to a twin deficit situation in the U.S., which clearly is negative for the currency,” Wayne Gordon, executive director for commodities and forex at the unit, said in a Bloomberg TV interview.

Trump has started to implement his agenda in the world’s largest economy after the Republican repeatedly promised on the campaign trail that he would rebuild U.S. infrastructure as well as deliver tax cuts. The outlook for the currency is also being shaped by the Federal Reserve, which has signaled it plans further interest rate increases this year with inflation coming closer to its goal and near-full employment. Shifts in the dollar can influence raw materials that are priced in the currency.

“At UBS we have a negative U.S. dollar view,” Gordon said in Singapore. “We believe the dollar has actually peaked. We think it rolls over here.” He added: “We hold that view because we see real interest rates going deeper into negative territory.” Negative real rates prevail when inflation is higher than nominal interest rates.

The Bloomberg Dollar Spot Index has lost 1.9 percent in 2017 after closing on Jan. 3 at the highest level since at least 2005. The LMEX Index of the six main base metals climbed on Tuesday to the highest since May 2015 amid prospects for increased demand, as well as potential supply disruptions.

The U.S. budget deficit in fiscal 2017 will be similar to last year’s gap, the Congressional Budget Office forecast on Tuesday, predicting a figure of $559 billion, or 2.9 percent of GDP, compared with a $587 billion deficit in fiscal 2016. Excluding a boost in outlays in 2016 due to a shift in payments, the deficit this year will be about the same as last year, it said.

Trump has said his plans to slash taxes and push up spending won’t add to the deficit, and will instead deliver growth to levels not seen since before the financial crisis and create jobs. Downplaying unease over potential pressures, Treasury Secretary nominee Steven Mnuchin has said faster growth will help cut the level of debt because the U.S. will be in a better position to pay it off.

Fed Chair Janet Yellen said last week that the economy is close to the central bank’s objectives of full employment and stable prices and she’s confident it will continue to improve. Policy makers raised borrowing costs last month, adding to the hike that they agreed on in December 2015.

Other forecasters are also flagging risks for the U.S. currency. The dollar is close to its peak, and expectations for so-called Trumponomics may shatter when the U.S. president fails to attain the growth he’s promised, according to Eisuke Sakakibara, a former top currency official at Japan’s Finance Ministry.