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Widened Budget Deficit Weakens The U.S. Dollar

Widened Budget Deficit Weakens The U.S. Dollar

2011-09-13 19:31:00
Trang Nguyen,

THE TAKEAWAY: U.S. Budget Deficit Widened > Monthly Outlays Climbed > U.S. Dollar Weakens

The Monthly Budget Statement for August released by the Financial Management Service today marked the government’s 35th shortfall in a row since July 2008, the longest period of shortfall since 1954 . The monthly deficit widened from $129.3 billion last month to $134.1 billion, lower than economists’ projections of $132 billion from Bloomberg survey. The broadened gap between spending and revenue resulted from a climb in outlays to $303.4 million from $288.4 million in July. Meanwhile, the monthly receipts increased by the smaller amount from $159.0 million in July to $169.2 million. The U.S budget deficit in fiscal year 2011, excluding September’s figure, is hitting $1.23 trillion compared to the shortfall of $1.29 trillion in fiscal year 2010.

U.S. Monthly Budget Surplus/Deficit (BLN$): January 2008 to Present

Widened_Budget_Deficit_Weakens_The_U.S._Dollar_body_Chart_7.png, Widened Budget Deficit Weakens The U.S. Dollar

Prepared by Trang Nguyen

USD/JPY 1-minute Chart: September 13, 2011

Widened_Budget_Deficit_Weakens_The_U.S._Dollar_body_Picture_1.png, Widened Budget Deficit Weakens The U.S. Dollar

Charts created using Strategy Trader– Prepared by Trang Nguyen

The greenback loses ground against its trading partners when the monthly budget deficit printed worse than forecast. As can be seen from the one-minute USDJPY chart above, the currency pair quickly dropped after the budget statement released. The dollar plunged from 76.86 yen 76.81 yen after five minutes.

The monthly budget statement summarizes the financial activities of federal entities, disbursing officers and Federal Reserve banks, therefore, the prolonged negative figures indicated the worsening debt situation in the world‘s largest economy. Standard and Poor’s for the first time downgraded the U.S.‘s AAA credit rating one notch to AA+ in August mostly due to the lawmakers’ failure in reducing the more than $1 trillion budget deficit. The rating is threatened to be cut to AA within two years if budget deficit continues to be higher than agreed to.

President Barack Obama last month faced a hard bargaining with Republicans over federal budget deficit as he proposed a long-term deficit reduction package that includes roughly 3 trillion dollars in spending cuts on entitlement programs such as Social Security and Medicare for the elderly and 1 million trillion in revenue increase through tax reforms. He is expected to present to Congress his detailed deficit cutting plan and the proposed American Job Act on September 19. It is evident that if the lawmakers do not rapidly come into an agreement to narrow budget deficit, the U.S. debt problem will be deteriorated, thus prompting monetary traders and managers to cut their U.S. dollar holdings in their portfolios in the foreseeable future.

Written by Trang Nguyen, DailyFX Research Team

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