US Dollar could regain trust through fiscal prudence - Rabobank

Expectations of tighter US fiscal policy could push yields lower and weigh on the USD in the short term, according to Rabobank's Senior FX Strategist Jane Foley. She notes that the Dollar and Nasdaq futures swiftly recovered some of the losses initially triggered by the Democrat sweep in Congress. Over time, however, greater budget discipline may strengthen the greenback’s credibility and safe-haven standing.

Fiscal discipline could strengthen the Dollar’s credibility

"The market had also anticipated that Democrat control of Congress could suggest fewer fiscal giveaways and therefore less inflation. This suggests lower yields on treasuries which have negative implications for the USD. The DXY dollar index, however, has already started to reverse some of its initial losses."

"The possibility of fiscal prudence has clear implications for yields, Fed policy and the USD. On first take, these are USD negative. However, the medium-term outlook is far more nuanced."

"Since Trump’s tariff announcement in April 2025, the market has periodically debated whether the US treasury market is closer to losing its ‘exorbitant privilege’."

"Over the past year and a half, this has sporadically thrown up a debate about potential USD debasement. It follows that a more prudent budget policy would negate some of these fears. This suggests that the market’s initial conclusion regarding the negative implications for the USD from more prudent fiscal policy post-election, can be challenged."

"In essence more fiscal prudence, while USD negative in the short-term, is likely to positively impact the credibility of the greenback and its safe haven character over the long-term."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)