Currencies: "Dollar Builds on Gains"

From Marc to Market:

The Federal Reserve may not be on a coordinated campaign to convince the markets of a pending rate hike as it did so effectively in late February and early March. But investors are getting the message. The Bloomberg calculation of the odds of a rate hike before the end of the year has risen to 70% from 53% before last week's FOMC meeting and 33.5% at the end of last month. The CME puts the odds at 81% up from 37% a month ago.

Yellen did not break new ground yesterday. She reaffirmed the impression at her recent press conference that the uncertainties about inflation do not stand in the way of another hike this year. Remember the dot plots showed that 11 of the 16 Fed officials thought a December hike would be appropriate, up from eight in June.

Yellen acknowledged three areas of uncertainty about inflation which she and the Fed could be wrong. But rather than read this as self-doubt, as some in the media have, we suspect the market got it right. She was sharing an intellectual honesty that is often most noticed in its absence. Some of the Fed's critics accused of hubris and excessive dovishness. That does not seem to be the case presently, whatever the case may have previously.

Also the developments on the monetary policy front, US fiscal policy is front and center today. President Trump is expected to provide a framework for the tax reform. Ultimately, of course, it is in the legislative branch's hands. Much of the details have been leaked, including a 20% corporate tax schedule rate three household tax brackets (12%, 25%, and 35%), allowing businesses to write off capex immediately for around five years, and getting rid of the alternative minimum tax and estate tax. Households will lose the deduction for state and local taxes, while business' ability to write-off debt servicing will be curbed and the tax of global activity of US companies will change, with a tax holiday of some kind to induce them to bring back the excess funds booked overseas.

The important point to remember is that this is still very early days for tax reform. The latest implosion of the effort to "repeal and replace" the Affordable Care Act (Obamacare) underscores the legislative hurdles. In additional to the distributional gains/losses, some of the debate will center around what is called dynamic scoring. This refers to taking the impact on growth (and future tax revenues) of the tax cuts/reform themselves.

The increase in US rates and the anticipation of the tax announcement is not the only thing underpinning the dollar today. First, as we noted yesterday, there does appear to be a squeeze in the dollar funding markets (dollar shortage). It is not clear that these are quarter-end pressures, and what many is the fiscal year-end....MORE   

The last couple week's action in the dollar index via FinViz looks a bit extended, 93.25 last: