LDN - Business

Tax overhaul bets prop up dollar; sterling bucks trend

[December 04, 2017] By Saikat Chatterjee

LONDON (Reuters) - The dollar broke a three-day losing streak bed on Monday after the U.S. Senate approved a major tax overhaul at the weekend, though gains were limited as investors trimmed expectations of future U.S. rate hikes.

While U.S. officials have said the biggest change to tax laws since the 1980s would lift economic growth, investors said the boost would be minimal and is unlikely to force bond markets to radically alter their expectations of U.S. monetary policy outlook in the coming months.

"We are talking in the region of a 0.2 to 0.3 percent growth boost annually to what is already a very elevated trajectory of growth, and we don't expect that to have a major impact on U.S. interest rates," said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets in London.

The dollar's trade-weighted index <.DXY> was up 0.3 percent on the day at 93.14 after climbing 0.5 percent higher in opening trades. Monday's rise snapped three consecutive days of losses.

The Senate's approval on Saturday moves Republicans and President Donald Trump a big step closer to their goal, which would be the largest change to U.S. tax laws since the 1980s.

Still, the tax bill has a few more obstacles to clear before it becomes reality, and the dollar was trading more than 2 percent below a four-month high hit last month.

Currency markets only expect the U.S. central bank to raise interest rates slightly more than two times over the next year and even though ten-year U.S. yields have climbed four basis points on Monday, they remain effectively within a 15 basis point range they have remained in over the last two months.

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A man counts U.S dollar bills at a money exchange office in central Cairo, Egypt, March 7, 2017. REUTERS/Mohamed Abd El Ghany

Moreover, Rabobank strategists argue a stronger dollar resulting from the tax changes is an indicator of tightening financial conditions and may keep the U.S. central bank from raising interest rates sharply - a factor that may ultimately disappoint dollar bulls.

The dollar's bounce was also fueled by some short-covering after speculators added their biggest short bets against the dollar in more than a month to $6.213 billion, according to latest positioning data <NETUSDALL=>.

The dollar was up 0.6 percent at 112.905 yen <JPY=EBS> after rising to 112.985, its highest since Nov. 17.

The euro slipped 0.4 percent to $1.1857 <EUR=EBS>, as bets on the European economy offset any optimism generated by the U.S. tax bill. German industrial orders data for October due on Wednesday will be a key data point watched by markets.

Sterling was the only major currency to buck the trend. It traded a quarter of a percent higher on the day after a member of the European Parliament's Brexit group said there was a "very good chance" of a deal on an initial divorce package between Britain and the European Union.

(Reporting by Saikat Chatterjee, additional reporting by Shinichi Saoshiro in Tokyo, editing by Larry King)

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