It is no surprise there are many things in the works when it comes to the tax system. President Trump is leading the charge, and has chosen to be the guide for the Federal Reserve. Because of this, there are two major events that could happen fairly soon that would impact the dollar. According to one currency expert, this could result in a weakness in the dollar.
“I think the USD will likely be impacted by a few key decisions in the near term,” Citi forex trading chief Itay Tuchman said. “The next Fed chairperson and how much the person President Donald Trump nominates believes in the ‘low rates’ path is important.”
He mentioned this in an email sent directly to CNBC.
On the subject of the next Fed chairperson, there are several different names being thrown around. One of the names that has been mentioned the most to replace Janet Yellen is Kevin Warsh, who worked as a Fed member before and is considered to be a hawkish policymaker. This means that he is likely to support a substantial increase in interest rates. This is only speculation right now, and there are many people who do not think that this will be the case if he is chosen as the new chair of the Fed.
According to Stephen Gallo, who is currently serving as the European head of forex strategy at Bank of Montreal, “Our base case is that the new Fed chair appointee will not be an aggressive hawk. Once we remove the risk of a hawkish Fed chair appointee and once we see clear signs that the European Central Bank (ECB) is embarking on the quantitative easing (QE) taper, the stage will be set for more fundamentally-driven USD weakness over the medium-term.”
He also mentioned that the euro could be strengthening against the dollar because of some speculation that the central bank for the euro zone is working to tighten policy.
We still do not know who the next chair of the U.S. central bank will be, but we may know soon. During the last month of September, Trump said that he would be announcing his choice within the next few weeks. In addition to this major event, he has already promised that he will be making some massive changes to the tax system for the United States. This big change would allow for only three individual tax bands and we currently have seven. In addition to this change, his plans also outline a change to the corporate tax. The current plan he has outlines would reduce it from 35 percent to 20 percent.
There would also be a repatriation tax to help companies in the U.S. bring their offshore money back to the U.S. Nothing about this plan is new information since he campaigned on this for election, but it could have an impact on the dollar just like the choice of the new Fed chair.
Tuchman commented on what he thinks will happen to the dollar as a result of the tax reform debates in Congress by saying, “I am much more skeptical than most that something substantive enough to support a rising USD can get through a Republican congress, which seems to struggle to reach consensus at the moment.”
Gallo also commented on this topic and the strength of the U.S. dollar by saying, “Ultimately the tax cuts will cause the fiscal deficit to balloon.”
He added to this by saying that the lower corporate tax rate will boost some business investment in the short term but that inflation could increase as some companies may not increase wages but may invest in other things for the business. If that happens then it could impact the plans that the Fed has to tighten the current policy. He noted, “The gains for the USD would only be temporary and they would not offset the medium-term downward trend in the USD.”
Currently, the U.S. dollar is worth nine percent lower than it was worth at the beginning of the year when it is compared to the other major foreign currencies. It is also trading at levels that are similar to those that we had in 2015.
Regards,
Ethan Warrick
Editor
Wealth Authority
