Brown Brothers Harriman’s (BBH) Elias Haddad notes that efforts by the Trump administration to narrow the US trade deficit are structurally negative for the Dollar via balance of payments dynamics. However, Haddad argues near-term USD downside is limited as the US labor market stabilizes, with April non-farm payrolls and University of Michigan sentiment data seen as key for Fed expectations.

Structural headwinds but data support

"In our view, the Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities. That’s pure balance of payments mechanics and is a structural drag on USD."

"In the near-term, USD downside is limited largely because the US labor market is stabilizing, keeping odds of Fed funds rate hike in play. Today’s April non-farm payrolls report is expected to validate earlier data pointing to steadier labor demand (1:30pm London, 8:30am New York). Consensus is looking for +65k job gains vs. +178k in March and the unemployment rate is seen unchanged at 4.3% in April, a tick below the FOMC 2026 projection (4.4%)."

"It’s worth noting that in the three months to March, employers added an average of 68k jobs to payrolls each month. That pace of growth is well within the breakeven range that is necessary to keep the unemployment rate steady given the slowdown in overall labor force growth. A recent Fed research note estimates the breakeven pace of employment growth to average 18k in 2026, substantially lower than at any point in the past 65 years."

"May University of Michigan sentiment survey is due later today (3:00pm London, 10:00am New York). Long-term inflation expectations are critical to watch as any drift higher would push the FOMC towards a more hawkish bias. Encouragingly, the New York Fed consumer expectations survey released yesterday showed long-term inflation expectations (3 and 5 years out) remain anchored around their 12-month moving average in April."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)