On an upswing in recent months, the fate of the US dollar hinges on whether Congress passes major tax reform, with future Federal Reserve interest rate rises already priced in, according to the latest Reuters poll of currency strategists. But an agreement to overhaul the complex US tax code - giving the largest American tax cut since modern corporate tax began more than a century ago - is by no means certain by the late November deadline that the Republican Party says it is aiming for.
Indeed, optimism about the dollar, which had its best month since February in October, has wilted following a Washington Post report on Tuesday that suggested Republican leaders were considering a one-year delay in the implementation of a big corporate tax cut to comply with Senate rules. The Republicans were dealt another setback after the Democrats' recorded a comprehensive political victory in Virginia on Tuesday.
The consensus view from the latest poll of over 60 foreign exchange strategists, taken November 3-8, showed the dollar was expected to hold steady over the coming year. However, the lowest forecasts for the dollar were even more pessimistic than last month against several currencies.
While about 80 percent of over 50 strategists who answered an extra question said significant tax reform would help the dollar, not everyone was convinced that Congress, which has failed to pass any major legislation this year, will deliver. "The USD has been stabilizing, mainly thanks to investors shifting their focus back to US President Trump's tax overhaul plans, as well the FOMC having a potentially more hawkish composition next year. From the current levels we expect the USD to face only limited upside risks," wrote Valentin Marinov, head of G10 FX strategy at CA-CIB, in a note.
"This is especially true as a December hike by the Fed is largely priced in." While speculators trimmed their bearish bets on the dollar to the lowest in 15 weeks, the latest data marked the 16th straight week that they maintained a net short position, according to the Commodity Futures Trading Commission. "We see USD nearing the end of its rally," noted David Adams, G10 FX strategist at Morgan Stanley. "Near-term political risks relating to tax reform also keep us bearish on USD as much of the positive news on tax reform has been priced in."
That uncertainty about the passage of a bill to cut taxes has also hauled down inflation expectations and long-term bond yields while upcoming rate increases are pushing short-term yields higher, flattening the US yield curve to levels not seen in a decade. President Donald Trump's decision to appoint Jerome Powell as Fed Chair when Janet Yellen's term expires in February has also kept dollar expectations steady.
More than three-quarters of over 50 analysts who answered a separate question said the risks to their dollar forecasts were unchanged after that appointment. The euro fell over 1 percent last month against the dollar but has traded in narrow ranges after the European Central Bank said on October 26 it was cutting its monthly bond purchases in half to 30 billion euros a month from January.
The central bank extended its asset purchases by nine months, which also kept the euro from rising further. Still, the single currency has gained over 10 percent against the greenback this year and is set to mark in 2017 the first calendar year gains since 2013.
The euro was predicted to trade at around $1.16 in a month, about where it was on Wednesday. It is then forecast to inch higher to $1.17 in three months and rise to $1.20 in a year, similar to predictions made in the previous poll. The contrasting views for monetary policy in the United States and Japan has pushed the dollar up against the yen to an eight-month high of 114.735 on Monday.
While the Fed is expected to stay on a path of gradual tightening, the Bank of Japan is forecast to be in no hurry to exit its ultra-easy monetary policy. The yen is expected to hold steady against the dollar and trade around 114.7 in a year, from about 113.6 on Wednesday. The range of forecasts showed higher highs and lower lows compared with the previous month.