Dollar gets a boost as ‘Trumpflation’ bets return

October 20, 2017 | By | Reply More

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dollarLONDON: The US dollar climbed on Friday, on track for its first weekly rise in two, as progress of the US tax plan through the Senate raised hopes of a fiscal boost to the economy, though the lack of inflationary pressures checked gains.

Hopes of a fiscal boost to the US economy after President Donald Trump promised major tax reforms pushed the dollar up to a 14-year high in early January but it has since fallen more than 12% against a trade-weighted basket of currencies as those expectations have dissipated.

But the Senate’s approval for a budget blueprint for the 2018 fiscal year that will pave the way for Republicans to pursue a tax-cut package without Democratic support, revived expectations that tax cuts may be on the way. Analysts nevertheless warned against reading too much into the headlines.

The dollar has been supported this week and US Treasury yields have risen — with 10-year maturities hitting a 1-1/2 week high of 2.37% — as investors bet a fiscal boost may push up inflation. That could prompt the US Federal Reserve to raise interest rates more than what markets have expected — what is popularly known as the “Trumpflation” trade.

“We have the Trumpflation trade story coming back overnight but we would be wary of buying the dollar solely on this move until we get more clarity, though we expect some general dollar strength going into the final quarter,” said Thu Lan Nguyen, an FX strategist at Commerzbank in Frankfurt.

Price pressures remain particularly subdued in the United States despite tight labor markets with core PCE inflation, one of the US Federal Reserve’s favorite measures of inflation, at a one-year low of 1.3% in August.

Analysts don’t expect a rebound in price pressures with CLSA strategists saying inflation has probably peaked in this cycle.

The dollar rose 0.7% on the day to 113.30 yen, having risen to as high as 113.315 yen at one point, its strongest level since Oct. 6.

The dollar is likely to be supported against the yen in the near-term, said Peter Dragicevich, G10 FX strategist for Nomura in Singapore, helped by a widening in US-Japan yield differentials. Japan’s general election on Sunday also seems unlikely to lead to any surprises for the market.

Recent media forecasts have suggested that Japanese Prime Minister Shinzo Abe’s ruling coalition is on track to roughly match the two-thirds “super majority” it held in parliament’s lower house before the snap election was called.

Also on Friday, the New Zealand dollar sank to a five-month low on concerns the new Labour coalition will take a harder stance on immigration and foreign investment than the outgoing center-right government.

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