- Dollar takes a step back ahead of quarterly US GDP data
- Risks seem tilted towards stronger-than-expected report
- GDP release is scheduled for 12:30 GMT on Thursday
US economy outperforms
It’s been a solid year for the American economy, which has performed well even in the face of sky-high interest rates. Economic growth seems to have accelerated over the summer as consumers continued to spend, supported by a labor market that remains exceptionally strong.
Another factor behind this resilience has been the government’s heavy spending. The US government is running an enormous budget deficit, which at 5.5% of GDP is the largest deficit the country has ever run outside of recessionary periods or major wars.
This tremendous spending has helped safeguard economic growth, but it has also sent borrowing costs spiraling higher. Yields on longer-dated US government bonds briefly topped 5% for the first time since 2007, as the Treasury continues to flood markets with newly-issued debt to fund its budget shortfalls.
Even though it appears fiscally irresponsible, this situation has been a blessing for the dollar. The US currently enjoys the strongest growth among the G10 nations and offers the highest real yields, making the dollar more attractive both from an economic and an interest rate perspective.
Positive GDP surprise?
Turning to the upcoming dataset, GDP growth is anticipated to have reached an annualized pace of 4.2% in the third quarter, which is double the 2.1% achieved in the second quarter. Such an acceleration would be impressive, and there is even some scope for an upside surprise.
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