No Boost for Dollar as Trump Releases Tax Plans Scant on Detail
- Written by: Gary Howes
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The big event of the day for foreign exchange markets was the release of the US administration’s proposed changes to the US taxation system.
The Dollar shot higher following the election of Donald Trump back in November as traders bet that the new president would introduce some game-changing changes to taxation.
The boost to the economy that these changes were expected to bring saw the Dollar ride higher in what has become known as the Trump-Trade.
The rally has since faded in lieu of details - as would naturally be expected - and today was the day that those details were supposed to come.
Expectations were high that the Dollar's run higher might be kick-started once more.
The problem for Dollar-bulls is the details released actually weren't extensive enough to do so.
What was Announced
The proposals filled little more than a page. Nevertheless, highlights of today’s announcement:
- Personal tax brackets go from 7 to 3: 10%, 25%, 35%. Income brackets not yet determined.
- Capital gains taxed at 20%.
- No taxes on couples earning under $24K.
- Corporate taxes slashed to 15%, with small business included.
- One-time tax on foreign earnings, rate not yet determined (Mnuchin: rate will be “very competitive”).
- Shift to territorial corporate tax regime.
How the Dollar Reacted
The US Dollar index - a measure of the Dollar’s value against a basket of currencies - is quoted at 98.91, down from today’s high at 99.15.
The Euro to Dollar exchange rate is at 1.0893, down from a high of 1.0951.
The Pound to Dollar exchange rate is at 1.2839, down from a high of 1.2864.
So, no fireworks here.
What the Analysts are Saying
Reaction to the plans have been as expected considering all the announcements were expected and therefore front-run by the market.
Analyst Avery Shenfield at CIBC Capital Markets says passing something close to this package will be a challenge.
“In the Senate, unless the tax cuts are made to expire in 10 years, or are somehow judged by the independent Congressional Budget Office as neutral to the deficit a decade from now (unlikely, in our view), 60 votes would be needed for passage,” says Shenfield.
The analyst argues the necessary support from Democrats won’t be forthcoming, since they will fear that deep revenue reductions from the corporate sector will restrain future entitlement spending and increase inequality.
“There are some who see increased infrastructure spending as a bargaining chip to bring Democrats on board, but combined with tax reductions, that risks taking deficits to levels that fiscal conservatives on the Republic side of the aisle won’t tolerate,” says Shenfield.
So looking ahead it appears market will now want to see whether the taxes will actually become reality.
But, should they come to pass they would likely be positive for the Dollar.
“The meat of the reforms are largely as expected - we have a massive cut to the headline corporate tax rate to 15% and a one-off repatriation tax. We don’t know what that will be, just that it will be ‘very competitive,’” Neil Wilson at ETX Capital.
US corporates have about $2.6 trillion stashed overseas, undoubtedly repatriation will be a massive boost to the Dollar as it further fuels higher inflation expectations and therefore expectations for higher US interest rates.
Even if the plans are eventually passed and enshrined in law we question whether it will really provide a sustained boost to the Dollar.
As we have noted in a couple of articles on this site, the US is unikely to see the tax cuts pay for themselves and therefore the world's largest economy faces a massive budget crisis in coming years.
And this would undoubtedly be Dollar-negative.
