Dollar Strengthens Ahead of Trump’s Policy Address

Dollar gained ground after dipping to a two-week low against the yen on February 27th, 2017

The dollar gained some ground after dipping to a two-week low against the yen in Asian trading on Monday, February 27th, 2017, as investors awaited clues on tax reforms from US President Donald Trump, as reported by Reuters. The two main themes that are expected to influence currency and market movements this week are Trump’s tax policies and the impending French elections. Trump will make his first major policy address before the Congress on Tuesday, February 28th, 2017. The Trump administration is expected to provide more details of his infrastructure spending and tax plans. Market participants say that so far, Trump reform policies have lacked fresh direction, which could disappoint investors and weigh on the dollar. Going into the day ahead of Trump’s speech, the dollar is likely to again fall below the 112 level, according to analysts.

Treasury Secretary Steven Mnuchin stated that Trump will provide more details about his sweeping plans to cut taxes for the middle class, simplify the tax system, and make American companies more globally competitive with lower rates and changes to encourage US manufacturing. Earlier, Trump has announced a rollback of financial regulation with few details and no clarity on the size and scope of the tax cuts that he had earlier promised.

The Trump administration has stated that new taxes on imports and increased infrastructure spending could boost inflation. The Trump administration as it seeks to deliver 4% annual gross domestic product growth, largely on the back of a plan to cut taxes, reduce regulations, increase infrastructure spending, and renegotiate trade deals in favor of the US. However, some economists are skeptical of the 4% growth pledge, mainly because annual GDP growth has not ever exceeded 2.6% since the 2007-08 recession. Meanwhile, Trump has proposed an expansionary fiscal policy stance, which could increase the budgetary deficit.

Dollar strengthens against yen

The dollar added 0.2% to $112.20 yen after falling as low as $111.920 yen earlier in the session, its lowest since February 9th, 2017. The euro was steady at $1.0562 after concerns about France’s upcoming election continued to weigh on the currency. On the other hand, the Sterling skidded 0.4% to $1.2425 GBP. The dollar index, which tracks the dollar against a basket of six major currencies, benefited from the sterling’s weakness and edged up 0.1% to 101.16. The Scottish government is increasingly confident it can win a new independence referendum and is considering calling one next year as Britain exits the European Union.

Treasury yields weigh on dollar

In recent weeks, the lower yields from US Treasury notes have weighed on the greenback. The yield on the benchmark US 10-year note dropped to five-week lows last week. It stood at 2.331% on Monday, compared to Friday’s US close of 2.317%. Putting pressure on US Treasury yields, economic data also showed that new home sales grew lesser than expected in January 2017. Consumer sentiment weakened, although it remained at a level consistent with a healthy pace of consumer spending.

Consumer confidence retreats

Consumer confidence retreated in February 2017 from a 13-year high as Americans tempered expectations of their finances and the economy, with sentiment remaining sharply divided among Republicans and Democrats. The University of Michigan stated that its preliminary index of sentiment cooled to a three-month low of 95.7 from 98.5 in January 2017. While more than half of those surveyed expect better economic conditions in the future, and the share of respondents saying they were better off financially was at a 12-year high, the results reflected stark differences between Republicans and Democrats following the election of Donald Trump as president. Republicans registered sentiment about 40 points higher than Democrats, according to the survey. Six in 10 consumers surveyed mentioned government policy, either negatively or positively.

Meanwhile, data from the Commodity Futures Trading Commission (CFTC) showed that traders increased bullish bets on the US dollar for the first time in seven weeks on Friday, as per Reuters. The value of the dollar’s net long position totaled $15.02 billion in the week ended February 21st, 2017, up from $14.99 billion in the previous week. The CFTC data also showed net shorts of 50,162 Japanese yen contracts, the lowest in more than two months.

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