Huitong Network News--The dollar rose against major currencies on February 20 and continued to rebound from a three-year low hit last week, but concerns about the outlook for the US fiscal deficit remain cloudy. Goldman Sachs Group believes that US government spending is expected to push up interest rates and debt, and the recent rise in the US dollar is only an adjustment to the long-term decline, and its outlook is still shrouded in fiscal deficit worries.

The dollar rose against major currencies on Tuesday, continuing to rebound from a three-year low hit last week, but concerns about the outlook for the US fiscal deficit remain cloudy. Goldman Sachs Group believes that US government spending is expected to push up interest rates and debt, and the recent rise in the US dollar is only an adjustment to the long-term decline, and its outlook is still shrouded in fiscal deficit worries.

As of press time, the dollar index rose 0.45 per cent to 89.66; it fell to 88.15 on Friday, its lowest level since December 2014. The dollar rose against the yen, rising 0.53 per cent to 107.12 on the day, rebounding from a 15-month low of 105.55 on Friday.

The dollar has been weak in recent months as the Fed's expectations of a faster pace of interest rates have been offset by a series of concerns. These concerns include the negative impact on the US economy of tax cuts for large companies and increased government spending, and the market expects the deficit to be close to $1 trillion in 2019.

Analysts believe that the US government's tax cuts and spending plans could be counterproductive because it could lead to unnecessary inflation when the economy is already overheating. In addition, the market expects other central banks other than the Fed to accelerate monetary tightening, which will reduce differences between the Fed and other central banks, thus weakening the relative attractiveness of the dollar to investors.

Us government spending is expected to push up interest rates and debt

Goldman Sachs Group, a well-known investment bank, believes that the United States is full of deficits and warns that US government spending could push up interest rates and debt levels. The federal deficit will move into "uncharted territory", suggesting that the Trump administration and congressional Republicans may not be able to expect economic reform to move forward in the long run.

After the US government unveiled ambitious infrastructure plans and an almost comprehensive budget, Goldman Sachs Group said in a report to clients that the US debt level would reach 5.2 per cent of GDP by 2019 and would gradually climb thereafter.

Republicans rely heavily on fiscal stimulus provided by tax reform-many companies have announced investment plans and bonuses, and even taxpayers are enjoying lower interest rates. But opinion polls suggest that Republicans may lose control of Congress, and President Trump has an approval rating of less than 50% in most polls.

Goldman Sachs Group said that the economic impetus brought by tax reform is likely to decrease after this year, and the fiscal expansion policy will increase the US economic growth rate by 0.7 percentage points in 2018 and 0.6 percentage points in 2019. But it is likely to end after that-spending and debt will damage the world's largest economy.

The surge in debt share was triggered by mandatory spending.

Of course, tax cuts are also partly to blame, Goldman Sachs Group said. "it is expected that the unsustainable surge in mandatory spending-including Social Security, Medicare, Medicaid and income support programs-will be mainly responsible. "

The Congressional Budget Office estimates that the US debt-to-GDP ratio is currently around 77 per cent. If the current imbalance persists, Goldman Sachs Group expects it to be as high as 85 per cent by 2021. Even the Congressional Budget Office made an even scarier forecast last year: if left unchecked, US debt as a share of GDP could soar to 150 per cent by 2047.

Goldman Sachs Group analysts pointed out that the effect of economic growth comes from changes in the deficit, not from changes in economic levels, and further expansion will plunge the United States into a more unsustainable long-term trend. In addition, some recent deficit expansions involve changes that cannot be repeated, such as the temporary impact of certain tax rules.

Interest rate hikes and debt expansion will cause interest payments to soar

Recently, the US Treasury predicted a warning line that it would have to borrow nearly $1 trillion this year and exceed that level in the next few years. Goldman Sachs Group also stressed that this is true, saying that the Ministry of Finance is borrowing at record low interest rates, but cannot be expected to do so indefinitely.

'We expect the Fed to raise interest rates and increase debt levels to lead to a significant increase in interest payments, 'said Goldman Sachs Group. According to our current projections, federal interest payments will rise to 2.3 per cent of GDP by 2021 and 3.5 per cent by the end of 2027.

The recent rise in the US dollar is only an adjustment to the long-term decline.

And earlier, Goldman Sachs Group ZachPandl, co-head of global foreign exchange and emerging market strategy, also pointed out that the dollar will return to the trend of weakness, which usually happens during periods of strong US economy. The recent rise in the dollar is only a brief rebound in its across-the-board downward trend. The Fed's move to raise interest rates did not prevent the dollar from falling.

The Fed is expected to raise interest rates in March and is expected to raise rates several times this year, but the strong economic performance of the eurozone and the prospect of tapering its stimulus package are expected to mask the impact of the Fed's rate hike. Although the normalisation of Fed policy is well ahead of the ECB and rising wages signal a rebound in inflation, strategists say these potentially positive factors for the dollar have been largely digested long ago. and market concerns about the outlook for the US fiscal deficit will still overshadow the outlook for the dollar.