US Dollar: Could fiscal prudence rebuild confidence? - Rabobank

The Dollar and Nasdaq futures swiftly recovered some of their initial losses following the Democrat sweep in Congress, notes Rabobank's Senior FX Strategist Jane Foley. While expectations of tighter fiscal policy could push US yields lower and weigh on the USD in the short term, Foley argues that greater budget discipline may eventually strengthen the greenback’s credibility and safe-haven standing.

Could fiscal prudence 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. Learn more.)