According to one currency expert, progress in the revision of the U.S. tax system and the choice of a President Donald trump next head of the Federal reserve system can be two major events that will lead to the weakening of the U.S. currency.
“I believe that for the dollar in the short term, may affect several key decisions. It is important who will be the next fed Chairman and how many people will appoint a President trump believe the way to “low” bet,” said Itay Tukhman, head of global foreign exchange Department at Citi.
One of the most mentioned names to replace Janet Yellen as fed Chairman is Kevin Warsh, a former member of the Federal reserve. It is perceived as more “hawkish” politician, which means he probably will support a strong increase in interest rates for the country.
However, some traders continue to doubt it. “Our main scenario is that the newly appointed Chairman of the fed will not be aggressive a hawk,” said Stephen Gallo, head of European Department of currency strategy at Bank of Montreal.
“As soon as we eliminate the risk of a “hawkish” appointment of the Chairman of the fed, and as soon as we see clear signs that the ECB is embarking on the tapering of quantitative easing (QE), this will set the stage for a more fundamentally-driven weakness of the us dollar in the medium term,” added Gallo. Gallo also believes that the ECB may tighten policy, thereby triggering a strengthening of the Euro against the dollar.
Trump said in the last week of September that his decision concerning the next Chairman of the Central Bank of the United States will be announced “within the next two to three weeks”. Trump also promised one of the biggest changes in the tax system of the country, reducing the individual tax categories from seven to three. Under his plan, the corporate tax will also be reduced from 35 to 20 percent, and the tax will be levied on repatriation, to ensure that the company will return back the offshore money in the United States.
Tukhman believes that what will happen in the debate on tax reform in Congress for the next two months, will certainly affect the dollar. “I’m far more skeptical than most about the fact that something substantial enough to support growth of the dollar may pass than the Republican Congress, which, it seems, is now trying to reach consensus,” he said.
Gallo added that in the medium term, he does not expect a significant US dollar strengthening, because “ultimately, the tax cuts will increase the budget deficit”. In addition, a lower corporate tax rate is likely to stimulate business investment, which can lead to the weakening of the recent growth of inflation, given that companies may prefer to invest in machinery rather than increase wages, Gallo said, and added that this may affect plans for the fed to tighten policy.
Gallo noted that the proposed tax on repatriation would be a positive development for the dollar, if it was part of an overall package of measures. “But the dollar will be only temporary, and the tax would not compensate for the medium-term downtrend in the US dollar,” added Gallo.
From the beginning, the US dollar fell 9 percent against a basket of major foreign currencies. Now the dollar is trading at similar levels observed in early 2015.
Information-analytical Department Forex club