Uncertainty Over Impact of Tax Reform Pressures U.S. Dollar

James Hyerczyk

Updated Mon, Dec 25, 2017, 8:29 PM

Despite the light pre-holiday volume in the Forex markets last week, there were some meaningful moves dictated by activity in Washington and several key economic events.

U.S. Tax Reform

In Washington, the Republican-controlled U.S. Congress last week approved a broad package of tax cuts in what has been described as the largest overhaul of the tax code in 30 years. President Trump could sign the bill into law this week.

The U.S. Dollar closed lower against a basket of major currencies and at times posted a two-sided trade. Helping to support the dollar was the idea that the tax overhaul plan could prompt the Federal Reserve to raise interest rates at a faster-than-expected pace. Sellers felt differently, however, suggesting that at the very least, the economy could see modest benefits from the U.S. tax program.

At the end of the week, March U.S. Dollar Index futures settled at 92.924, down 0.539 or -0.58%.

U.S. Gross Domestic Product

Speaking of the economy, data released last week showed that the U.S. economy grew at 3.2 percent in the third quarter, its fastest pace in more than two years. The report showed the economy was boosted by robust business spending. Although GDP could be lifted next year by the sweeping tax cuts passed by Congress, dollar traders thought otherwise and sold the Greenback after the economic data came in below the estimate.

In other news, U.S. consumer spending accelerated in November amid an increase in demand for recreational goods and utilities, but traders were worried that the strong pace of consumption is unlikely to be sustained as savings dropped to their lowest level in more than nine years.

Consumer Spending

According to the Commerce Department, consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6 percent last month after a downwardly revised 0.2 percent increase in October. Traders were looking for consumer spending to increase 0.5 percent in November after a previously reported 0.3 percent rise in October.

Personal Consumption Expenditures

Monthly inflation remained benign in November. The Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, rose 0.1 percent in November after gaining 0.2 percent in October. The so-called core PCE increased 1.5 percent in the 12 months through November, picking up from 1.4 percent in October.