Forex - Dollar Slips Lower but US Tax Hopes Support

Galtero Lara
Diciembre 20, 2017

LONDON, Dec 18 (Reuters) - The dollar dipped against a basket of major currencies on Monday amid doubt whether a proposed USA tax reform programme would have a major impact on economic growth, after the bill moved another step closer to ratification over the weekend.

Traders are shying away from taking big positions ahead of the holiday season, although news that the USA tax overhaul was set to become law helped support some risk appetite.

The U.S. House of Representatives, which introduced initial tax legislation barely six weeks ago, was poised to act first with a Tuesday afternoon vote.

The euro rose slightly on Tuesday as investors took a cautious view over how much tax reforms, if passed, would boost the US economy, with most major currencies trading in tight ranges in a relatively thin market. Traders believe most of the positive impact of the cuts to corporate taxes have already been priced in, while expectations the overhaul would trigger a wave of repatriated dollars were overplayed.

"We think FX markets are less fazed by the bill; whether it will induce a material shift in investment and the balance of payments remains unclear", said Mazen Issa, senior FX strategist at TD Securities in NY.

While it remains roughly 3 percent away from the 2-1/2 year peak of almost $1.21 hit in early September, the 2017 gains show how sentiment towards the euro zone has turned around completely from earlier this year when the bloc's breakup was discussed.

In mid-morning trading, the dollar rose 0.2 percent against the yen to 112.82 yen JPY=.

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The euro EUR=EBS was up 0.2 percent at 1.1805 against the dollar, and broadly flat against the pound EURGBP=D3 at 88.16 pence per euro.

Against the euro, however, the dollar was weaker. The euro benefited from the dollar's weakness, gaining 0.4 percent to $1.1794.

Europe's shared currency has gained more than 12 percent against the dollar so far this year and is on track to post its strongest yearly performance since 2004.

"It's a bit neutral", said Viraj Patel, a foreign exchange strategist at ING.

While Fed policymakers expect the USA economy to get a short-term lift from the tax reform, they project growth will then ease back to about 2 percent by 2020 and not rise to around 3 percent as Trump and his administration predict.

"While the tax bill is likely to be passed and a government shutdown is also likely to be averted, both these concerns have to be assuaged before the dollar can rise", Yamamato said.

The dollar also failed to get support from subdued U.S. Treasury yields.

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