Trump's Tax Reform Policies Should Give Boost to US Dollar Over Medium-term, not Long-Term says Commerzbank's Lauchtmann.

A rough sketch proposal of tax cuts has been presented by the US adminstration, now analysts are estimating its expected impact on the Dollar.

Finer details will be hammered out in negotiations with Congress but even the rough draft has given markets food for thought.

The first thing to note about the proposals is that the reforms appear to be significant:

"What is clear is that the relief should be considerable - probably in the area of USD 3 to 7 trillion over the coming 10 years," says Commerzbank's, Head of Foreign Exchange & Emerging Markets, Ulrich Leuchtmann.

Originally Trump said he would not cut taxes unless and until healthcare had been reformed and the health bill reduced, then the extra money saved could be used to cut taxes, however, his failure to reform healthcare now means there is no extra revenue to pay for the tax reforms.

Nevertheless, regardless of this, the Trump administration has put forward a plan to reform taxes anyway.

It is possible their confidence is borne of a belief that the tax relief being proposed will be substantial enough to drive growth and therefore offset the money required to fund them, or as Leuchtmann puts it, "the offsetting finance (is) to be redundant."

The analyst is sceptical that this should necessary be so, however, describing the the idea as "utopian."

He says that as a result of the cost of tax cuts (1) national debt will rise and (2) the current account deficit will increase.

"Neither is good for the Dollar long-term, but the USD positive economic effects may dominate initially," he says.

The proposed reform of the corporate tax rate from 35% to 20% and reduction in tax on dividends could be even more important to exchange rates.

"Both steps make the US more attractive as an investment location and can strengthen the dollar medium term - as a result of increased capital imports," says Leuchtmann.

Yet he argues that higher capital imports will lead to higher "indebtedness", which will create longterm risks for the currency.

Offshore Repatriations  

One major policy which has always been expected to contribute to a stronger Dollar is the tax hoiliday on overseas holdings which are repatriated back to the US.

Multi-national corporations as well as companies and individuals attempting to create tax efficient offshore schemes have for many years stored a great deal of money overseas.

The proposal is that this cash pile should now be repatriated by reducing corporation tax or intriducing a one-off tax holiday on inflows.

The policy has a president in the "repatriation tax holiday" in 2004/05 which led to massive inflows, which were held to be responsible for the Dollar's rally in 2005.

Lauchtmann notes, however, that the difference then was that the tax holiday had a deadline at the end of 2005 after which it did not apply, and this incentivised a high level of flow before the end date, where as this time there is no deadline, so flows may not be as large.

"At present all profits made abroad will be taxed once - regardless of when and if they are actually being repatriated. That notably reduces the USD positive effect as US companies do not have to hurry to repatriate their revenue. They have long deadlines to make back payments," said Leuchtmann.

In conclusion Leuchtmann says that the impact on USD is likely to be a medium-term phernomena, as long it is not watered down by Congress.

He urges caution in relation to the extent of the impact:

"The only thing is: I can already imagine how some observers are going to use the tax reform as an excuse to predict an absurdly strong USD. However, the current tax reform does not provide any justification for extreme forecasts," said the Commerzbank analyst."

Another lomger-term Dollar-negative concern, not mentioned by Leuchtmann, but mentioned by UniCredit's, Chief US Economist, Dr. Harm Bandholtz, is that corporation tax cuts actually rarely boost growth, employment or wages and generally only benefited share-holders by increasing share-buybacks, adding to  already high "income inequality".