The strong dollar is impacting csi commodity equity index and non-USD currencies, but Bank of America believes that a strong dollar supported by fiscal stimulus will not last long.

On November 13, Bank of America forex strategist Athanasios Vamvakidis and his team released a report stating that part of the strong dollar's rise is due to the USA's fiscal policy being more accommodative than that of other G10 countries. This year, the USA's fiscal policy has further loosened, along with policies such as tax cuts initiated after Trump's election, which may push the dollar higher in the short term, but in the long run, this strength is unsustainable.

There are three reasons why the dollar's strength is unsustainable: First, the market has already priced in the impacts of Trump's policies in advance, and there are uncertainties regarding the specific implementation of these policies; second, the possibility of the USA further expanding its fiscal deficit relative to the Eurozone is low;

Finally, even if the USA continues to ease fiscal policy, factors such as a resurgence of inflation in the USA, market concerns over the independence of the Federal Reserve, and market pricing of rapidly deteriorating debt risk premium may also make it difficult for the dollar's strength to be sustained.

Currently, the dollar's real effective exchange rate has returned to historical highs. As of the time of writing, the usd has risen by 0.2% to 106.69.

Fiscal easing drives the strength of the usd.

Compared to other G10 countries, especially the eurozone, the economic performance of the usa has been outstanding—this exceptional performance has continued since the pandemic, leading to the so-called 'american exceptionalism,' a viewpoint that usd bulls typically rely on.

This year, the usa has further relaxed fiscal policy, with the actual deficit and structural deficit of the usa government being at the highest levels among G10 countries.

Undoubtedly, this may continue to support the usd in the short term.

However, Bank of America believes that the usa's outstanding performance is at least partly due to the federal government's high fiscal deficit. If this is indeed the case, then 'american exceptionalism' may not be sustainable, which also means that support for the usd may weaken in the long term.

Why is the strength of the usd unsustainable.

Why is the strength of the usd unsustainable? Bank of America states that there are three reasons:

First, Bank of America refuted the idea that the tax cuts and tariff policies implemented after Trump's inauguration would strengthen the dollar and support the theory of 'American exceptionalism.' Bank of America stated that this may support the dollar in the short term, but it is not bullish for the long-term prospects of the dollar.

The reason is that the fiscal policy stance of the Trump administration remains unknown. Although Trump promised tax cuts and spending cuts, the market has already priced in the inflation impact, and fiscal policy may become further accommodative due to tax cuts but could also tighten due to spending cuts.

Secondly, Bank of America believes that there is little likelihood for the USA to further expand its fiscal deficit compared to the Eurozone.

Bank of America observed that only during the global financial crisis and the pandemic did the structural deficit of the USA exceed that of the Eurozone. Historically, the likelihood of the USA further expanding fiscal stimulus compared to the Eurozone is currently low. If the USA cuts spending or the EU provides more fiscal flexibility policies, this gap will narrow.

Finally, Bank of America pointed out that even if the USA continues to ease fiscal policy, the strong dollar will still not be sustainable:

First, the USA economy may overheat and face the risk of rising inflation again; second, the Federal Reserve will have to turn hawkish, and the market may price in the risks to the independence of the Federal Reserve, especially as the relationship between Trump and Powell becomes increasingly tense, with Powell's term ending in mid-2026; third, the market will ultimately have to price in the rapidly deteriorating debt risk premium in the USA.

Therefore, Bank of America believes that any further unnecessary fiscal stimulus can only make the strong dollar a fleeting phenomenon.