A US clampdown on corporate tax reduction schemes - so-called inversions - will further underpin the strength of the dollar. The US government announced proposals in late September to make it harder for American companies to shift their tax bases abroad by acquiring other companies in jurisdictions with lower taxes.
Now the Chicago-based pharmaceutical company AbbVie has said it is reconsidering its $55 billion takeover of London-listed Shire. The announcement wiped $13 billion off Shire's stock price. Other deals have also been put on hold. But the implications of the US government's antipathy towards inversions goes far beyond the pain suffered by equity players who were long of Shire on Tuesday and are now nursing a hefty loss.
Inversion trades by definition see US corporations buying overseas companies, which means converting dollars into local currencies to fund the purchases. The amounts involved are big. Pending inversions, including the AbbVie/Shire proposal, had totalled some $135 billion. The trades are invariably dollar-negative to some degree, with the greenbacks often sourced from the cash US companies hold overseas - held to avoid paying relatively high US taxes.
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