With the Trump administration intent on fiscal spending, there is opinion from bank economists that this shall cause weakness in the USD. If we assume the spending will be serviced by domestic bonds, is this really a credible argument in today's climate and why? Thanks
An increase in government spending will increase the domestic interest rate. A lot depends on how analysts perceive future price levels and inflation. If the government spending is not expected to cause future inflation, an increase in interest rates may cause the dollar to appreciate. If instead, people expect a rise in future prices and therefore a future dollar depreciation, the spot exchange rate may depreciate as well.