Biden's Infrastructure Spending Spree to Underpin U.S. Dollar Outperformance says Credit Suisse

Image by Adam Schultz / Biden for President.

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Foreign exchange analysts at Credit Suisse are backing the U.S. Dollar to go higher as the U.S. economy picks up further traction thanks to President Joe Biden's newly announced infrastructure spending plans.

$2.25TRN worth of fresh spending on infrastructure projects were announced on March 31 as part of U.S. President Joe Biden's American Jobs Plan, a sum of money that will likely boost U.S. economic activity at a time other major economies continue to struggle.

The new spending will go towards improving roads, bridges, ports, railways, energy and waterworks, as well as ensuring full access to broadband.

"Our call for general USD strength continues to unfold," says Shahab Jalinoos, Global Head of FX Strategy at Credit Suisse. "The key driver remains ever-rising expectations for the US economy’s growth prospects."

Biden's agenda to move the U.S. away from fossil fuels means 'green' projects will also be significant beneficiaries of the spending.

"The plan lifted the safe haven U.S. Dollar but also boosted U.S. stock indices – the negative correlation of these two seems to have faded," says George Vessey, Currency Strategist at Western Union Business Solutions.

The spending will however also extend non-infrastructure sectors, such as social carers as well as in training and research and development to boost the country's manufacturing base.

"The market is having to digest the fact that President Biden is very serious about delivering a major infrastructure spending plan," says Jalinoos.

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The administration hopes to raise at least $1.8TRN over ten years to fund the spending by raising corporation tax, raising personal tax on the highest earners, hike death taxes and duty on foreign subsidiaries.

Expectations for higher U.S. growth rates have meant the yield paid on U.S. government bonds - which are issued to finance government spending - have risen, a sign that investors are asking for higher levels of compensation for investing in these assets.

Investors sense that higher growth rates in the U.S., driven by significant government spending, mean inflation rates will inevitably rise over coming months and years. Therefore, holding government bonds beyond five years will require a greater yield in order to compensate for lost value at the hands of inflation.

But a side effect of higher U.S. yields is often a stronger U.S. Dollar as foreign investors buy U.S. bonds and other financial assets that promise higher returns than would be the case elsewhere in the world.

"The bottom line is that President Biden’s spending plans are large, multi-year and extend beyond infrastructure spending – all factors currently being noted by US rates markets," says Jalinoos.

The American Jobs Plan comes in the wake of Biden's sizeable $1.9TRN stimulus package aimed at providing immediate support to Americans dealing with the ongoing effects of the coronavirus crisis.

"It’s another c10% of GDP, on top of the 10% added by his Covid bill and about the same added last year. This time, the package will be funded by tax rises, however these will be phased in over 15 years and it’s hard to see how the spending will not add to the deficit," says Neil Wilson, Chief Market Analyst at Markets.com.

Credit Suisse say shorter-term indicators suggest the U.S. economy is already picking up some traction as the country's medical crisis eases, vaccines are distributed and stimulus checks are put to work.

"This degree of fiscal activism is leaving the market constantly chasing its tail as to what it could mean for US growth / outperformance of other regions," says Jalinoos. "We are encouraged too by the contained behaviour of the VIX, and the lack of major drama in either implied volatility or even risk reversals in major currency pairs as the USD rally unfolds, to see USD strength as a natural / desirable by-product of likely US growth outperformance."

Credit Suisse strategists say the Dollar is likely to see strength against the Yen, Franc and Euro, although gains can also come against the pro-cyclical currencies such as the Australian Dollar and British Pound.

The EUR/USD forecast target is lower to 1.1500, USD/CHF to 0.9650 and USD/JPY to 112.50.