The US Dollar has traded pretty much flat overnight and in the London morning with its index against a basket of currencies at 94.45; still in the 94.20-94.57 in which it has been stuck for the last 48 hours. Though non-farm payrolls today will doubtless lead to half an hour of very volatile trading conditions, the bigger picture for the USD will now be framed by the President’s much-heralded tax reform. This formed a central plank of his campaign pledge to “Make America Great Again” but was delayed so much that the hopes of USD bulls were consistently dashed through the first 10 months of his term of office.
From November 9th to the beginning of January, the USD Index surged from 96.6 to 103.3 on hopes for a substantial fiscal boost, faster economic growth and much tighter monetary policy. None of this materialized. The Fed is still “measured and gradual”, GDP growth will be in the 2-3% range in 2017 and tax reform hasn’t yet happened. By late September, the USD Index had slid to just 90.9. A subsequent attempt to kickstart the fiscal agenda once again raised hopes and the index is now up at 94.4. This is where the real test now comes as the Republican Party releases details of its tax cut plan. These show the 20% corporate tax cut as permanent, and claim that a family of four earning $59,000 will get a $1,182 tax cut. However, the bill also includes the repeal of an itemized deduction for medical expenses, and limits the home mortgage interest deduction.
For new home purchases, interest would be deductible only on loans up to $500,000, down from $1 million. The bottom line for currency markets is that the 429-page “Tax Cuts and Jobs Act” still has no guarantee of passing any time soon. Keep a close eye on the politicians for it is they, not the Central Bankers, who are now crucial to the US Dollar outlook.