Dollar struggles as doubts grow over impact of U.S. tax bill

[December 19, 2017]   By Tommy Wilkes

LONDON (Reuters) - The dollar declined for a second consecutive day on Tuesday as investors took the view that a major U.S. tax overhaul would be unlikely to boost the economy significantly, with most major currencies trading in tight ranges in a relatively thin market.

World stock markets have roared ahead on U.S. tax cut hopes, but the greenback has remained muted. Traders believe most of the positive impact of the cuts to corporation tax have already been priced in, while expectations that the reform would trigger a wave of repatriated dollars overplayed.

The euro <EUR=EBS> was up 0.2 percent at 1.1808 against the dollar, and broadly flat against the pound <EURGBP=D3> at 88.16 pence per euro.

The dollar, measured against a broad trade-weighted basket of major currencies, was down 0.14 percent <.DXY>.

"A year ago there was a lot of excitement [regarding repatriation of dollars after the tax reform]. Now it's a bit of a damp squid," said Jane Foley, a senior FX strategist at Rabobank.

She said caution about the outlook for the U.S. economy was also holding the dollar back.

"It's very difficult to call for a significant increase in value of [U.S.] yields when inflation is low. That is a constraint for the value of the dollar," she said.

Traders are shying away from taking big positions ahead of the holiday season, although news that the U.S. tax reform was set to become law helped support some risk appetite.

The euro is up more than 12 percent against the dollar so far this year and is on track for posting its best annual performance since 2004.

While it remains roughly 3 percent away from the 2-1/2 year peak of nearly $1.21 hit in early September, the 2017 gains show how sentiment towards the euro zone has turned around completely from earlier this year when the bloc's breakup was discussed.

50 Euro banknotes are displayed in this picture illustration taken November 14, 2017. REUTERS/Benoit Tessier/Illustration

Euro zone economies have posted better-than-expected economic data and political stability this year has been stronger than many had predicted at the start of the year.

In the United States, the Republican-controlled Congress appears all but certain this week to pass the sweeping tax overhaul backed by President Donald Trump after two Senate Republican holdouts agreed on Monday to support it.

Rising hopes of the bill's passage helped push U.S. stocks to record highs on Monday. European stock futures had a timid start after corporate deal-making had pushed markets higher earlier in the week.

While Fed policymakers expect the U.S. economy to get a short-term lift from the tax reform, they project growth will then ease back to about 2 percent by 2020 and not rise to around 3 percent as Trump and his administration predict.

"The tax reform is going to be one of the key angles for markets this week...(but) nobody is going to be taking any major positions before the year-end," said Viraj Patel, a foreign exchange strategist at ING.

The dollar was broadly flat against the yen at 112.62 yen <JPY=EBS>, drifting in a range between a high of 113.750 hit a week ago and Friday's low of 112.035.

Bitcoin fell 5.52 percent at $17,895 <BTC=BTSP> on the Luxembourg-based Bitstamp exchange, below its record high of $19,666 hit on Sunday.

(Reporting by Tommy Wilkes; Editing by Saikat Chatterjee and Rich ard Balmforth)

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