Monday 20 August 2018

Dollar firm on tax cut hopes, euro underpinned by rise in yields

Photo: Reuters
Photo: Reuters

Hideyuki Sano and Masayuki Kitano

The dollar was supported on Wednesday by expectations that the Trump administration's tax reforms would pass through congress while the euro was underpinned by a sharp rise in German bond yields.

The Republican-led US Senate approved sweeping tax legislation in the pre-dawn hours of Wednesday, sending the tax cut package back to the House of Representatives for a final vote later in the day.

The dollar briefly extended its gains against the yen and touched an intraday high of 113.075 yen following the news of the Senate's approval, but reaction was muted overall.

The dollar last stood at 113.01 yen, up 0.1pc on the day, having pulled away from Friday's low of 112.035, with last week's high of 113.75 seen as its next target.

The House of Representatives had already approved the biggest US tax overhaul in 30 years on Tuesday, but another House vote is needed because of procedural issues.

Gains in the dollar were limited as many market players looked to the Bank of Japan's two-day policy meeting ending on Thursday for clues to whether the BOJ will join the US Federal Reserve and European central banks in winding back stimulus.

A speech by BOJ Governor Haruhiko Kuroda in November sparked speculation of a stimulus taper when he mentioned the concept of a 'reversal rate' - a level at which low interest rates start to have more harmful side-effects than benefits.

"There is very strong interest in the 'reversal rate'. Kuroda's news conference (when the BOJ meeting ends) will be pretty much all about just that," said Yukio Ishizuki, senior strategist at Daiwa Securities.

Uncertainty over the BOJ's intentions is a major reason the yen did not slip much despite the sharp rise in US bond yields the previous day, Ishizuki noted.

The BOJ is widely expected at this week's meeting to keep its short-term interest rate target at minus 0.1pc and pledge to guide 10-year bond yields around zero percent.

But Peter Dragicevich, G10 FX strategist for Nomura in Singapore, said, if anything, Kuroda may try to push back against some of the interpretations related to the issue of the 'reversal rate'.

"We think he will probably give the market a bit of a reality check. So we're not expecting him to increase market expectations of any type of policy normalisation," Dragicevich said.

The US 10-year Treasury yield stood at 2.455pc in Wednesday's Asian trade. On Tuesday, it had set a seven-week high of 2.472pc, nearing a seven-month peak of 2.477pc hit in late October.

The surge was driven in part by expectations of tax reforms raising US bond issuance, but many analysts said the immediate trigger was a jump in European bond yields on Tuesday after Germany unveiled a plan to issue more 30-year debt next year.

Higher euro zone yields underpinned the euro, which held steady at $1.1835, after rising 0.5pc on Tuesday.

Against the yen, the euro stood at 133.74 yen, not far from strong resistance levels around 134.50

Reuters

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