Dollar Pressured by Concerns Over Tax Reform’s Impact on Economy

Low pre-holiday liquidity and a battle between optimistic investors banking on the signing of the U.S. tax reform bill this week and those who doubt it’ll be good for the economy helped create a wide-trading range in the U.S. Dollar Index on Monday. A drop in the Euro also contributed to the 0.24% loss.

The U.S. House of Representatives is expected to vote on the tax overhaul bill at 1830 GMT and the Senate will vote shortly thereafter late Tuesday or early Wednesday. The current price action in the stock market strongly indicates that investors expect the bill to pass.

There are some who have doubts over the tax bill’s impact on the economy. President Trump and his administration predict U.S. economic growth at around 3 percent. However, last week, Fed policymakers said they expect the U.S. economy to get a short-term boost from tax reform, but they project growth will then ease back to about 2 percent by 2020.

Also holding back the U.S. Dollar is the Fed’s interest rate forecast for 2018. Last week, the central bank stuck with its earlier forecast for three rate hikes next year. The reaction in the market suggested investors were expecting at least four hikes. Although the Fed turned more upbeat on economic growth and the jobs market, it continued to expect muted inflation.

Gold

The weaker U.S. Dollar helped boost gold futures on Monday. Early Tuesday, gold is holding steady, moving lockstep with the U.S. Dollar. Although gold investors are optimistic that the tax bill would pass, there is still doubt surrounding its impact on the U.S. economy.

Gold is facing several headwinds at this time including record equity prices, demand for bitcoin and rising U.S. Treasury yields.

Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil finished mixed on Monday. Early Tuesday, a similar trading pattern is holding the markets in a narrow range.

Oil prices are inching up on Tuesday with the markets, especially Brent, underpinned by the Forties pipeline outage in the North Sea and the OPEC-led production-cut program. Surging U.S. output is putting a lid on any major advances.

U.S. Equity Markets

The three major U.S. stock indexes surged to all-time highs on Monday, before finishing at record closes. Prices were driven higher by optimism over U.S. tax reform and a few bullish corporate deals.

Investors are acting on the notion that stocks are undervalued given the tax overhaul that will drop the corporate tax rate from 35 percent to 21 percent. Additionally, Campbell Soup, Hershey and Oracle all announced acquisition deals.