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FX round-up: Dollar strength wanes in the wake of US tax reforms

28-09-2017 19:21

After initially rising late on Wednesday, in the wake of US President Trump's tax reform plan, the US dollar traded lower on Thursday.
Against a basket of currencies, the Greenback slipped 0.21% to 93.162 by 1700 BST on Thursday. It has gained 2.5% since hitting a 2 1/2-year low of 91.35 in mid September.

In it, Trump outlined plans to cut the main corporate tax rate from 35% to 20% and to reduce the number of tax bands from seven to just three, of 12%, 25% and 35%.

Market participants now seem to be coming to terms with the fact that Trump's plans will be subject to scrutiny in the form of voting and amendments before being finalised, resulting in a sell-off in the US dollar.

Takafumi Yamawaki, chief fixed income strategist at Morgan Securities said,"It is hard to expect this proposal to pass Congress smoothly."

"The market had given up on the Trump reflation trade and this is coming back with a bit more detail on tax plans," said Commerzbank analyst Rainer Guntermann.

"At the same time, this gives the Fed more ammunition to hike rates in the coming months."

Sterling received a leg up in morning trading, following speeches from British Prime Minister Theresa May and Bank of England (BoE) Governor Mark Carney, who both spoke at the opening of a two-day conference to mark 20 years of independence for the BoE.

Cable was at it's lowest point by 0900 BST at 1.3345, but has since managed to find bids to trade 0.32% up on the day to 1.3429 by the close of London stocks.

Sterling's rise came despite comments from Carney who admitted that Brexit would lead to weaker real income growth, while the prosperity of the UK will depend on the final Brexit agreement.

"We stay of the view that the BoE is on track with tightening monetary policy as part of the November meeting," wrote Credit Agricole strategists in a note to clients. "This in turn suggests that there is room of rising central bank rate expectations to the benefit of the pound."

The pound was relatively flat against the euro on Thursday trading, down 0.08% to 1.1407 as the single currency clung to positive data from Germany showing preliminary CPI data came in as expected at 0.1%, while economists were also reassured by a rise in euro zone-wide economic confidence readings.

The single currency received a more notable boot up against it's US counterpart, with EUR/USD 0.26% firmer to 1.1776, after finding daily support in the 1.1748 area.

Data for the US out on Thursday showed that final GDP quarter on quarter came in above expectations of 3% to print 3.1%. On the labour front, unemployment claims came in at a n expectation beating 272,000.

The Japanese yen received a vote of confidence from market participants on Thursday. Following a speech by Bank of Japan (BoJ) Governor Haruhiko Kuroda at the National Securities Industry Convention, USD/JPY traded 0.17% lower to 112.65 after Kuroda said that the current economic expansion is highly sustainable and inflation expectations are expected to accelerate to BoJ target.

The Canadian dollar steadied, after suffering its biggest drop in eight months on Wednesday, after Bank of Canada Governor Stephen Poloz dampened expectations for further interest rate hikes this year.

USD/CAD was relatively flat on Thursday, down only 0.17% to 1.2456.