US tax cuts to eventually underpin dollar: poll

Majority of currency strategists believe new bill will support greenback

The US dollar is set to lose a bit more ground against other major currencies next year, challenging a view among most foreign exchange dealers that aggressive tax cuts just passed by the US Senate will have a positive effect on the currency.

The latest monthly Reuters poll, taken from Monday to Wednesday, found that a slight majority of currency strategists who answered an extra question thought that if the final bill looks similar, it ought to support the dollar beyond a year from now too.

Still, the forecasts collected this week on how the dollar will perform were notably weaker, with the 12-month euro forecast the strongest in over three years of Reuters polls.

That suggests any boost to the already-strong US economy the tax cuts may provide remains unclear.

“In terms of the impact of the approved fiscal reform, analysis suggests that, at best, there will be a slightly positive economic impact in the shortrun, which could help to contain the USD weakening trend seen in most of 2017 against its G10 peers,” said Roberto Cobo Garcia, strategist at BBVA.

The dollar has lost close to 9 percent against a basket of six major currencies this year, on course for its worst calendar year performance in 14 years.

The bill that narrowly made it through the Senate last week is expected to scrap many exemptions and reduce the corporate tax rate from 35 percent to 20 percent. That is likely to increase the budget deficit by about $1 trillion over the coming decade.

Median forecasts from the poll put the euro at $1.22 in 12 months time. BBVA, which has ranked as one of the three most accurate forecasters for 12-month euro views over the past year in a sample of nearly 60, holds the median view.

ING Financial Markets, among the top 10 most accurate euro-to-dollar forecasters on a 12-month horizon over the past year, has the highest forecast at $1.30.

The European Central Bank is widely expected to wind down its asset purchase program by the end of next year, which is nudging the euro higher against the dollar.

Over the past year, the path of least resistance for the dollar has been lower. That is despite the US Federal Reserve’s campaign, launched two years ago, to gradually lift short-term interest rates.