Stronger Growth Can't Save Dollar as Policy Risks Rise

The U.S. gross domestic product report for the second quarter of 2017 confirmed that economic growth accelerated to a 2.6 percent annualized rate from the first quarter's sluggish 1.2 percent pace. That should reassure equity investors, but dollar bulls face a number of significant headwinds, including weak inflation, bearish trading technicals and now potential for U.S. fiscal policy disappointment.

It's been a tough year for the greenback, which has already fallen some 9 percent as measured by the Bloomberg Dollar Spot Index. Add to that the dour outlook issued by the International Monetary Fund, which earlier this week lowered its forecasts for U.S. GDP growth in 2017 to 2.1 percent from 2.3 percent, and cut its outlook for 2018 to 2.1 percent from 2.5 percent.

So how are we to reconcile a faster pace of U.S. economic growth in the second quarter against a backdrop of lower IMF growth expectations through the end of next year? Is the IMF just wildly wrong (as they sometimes are wont to be), or is there something more at play? In truth, the IMF likely reduced its outlook in part because fiscal stimulus seems less likely. This means that a risk of fiscal policy disappointment should be front and center.