After peaking at the outset of the year, the US dollar has been disappointing in 2017. Accelerating GDP growth, two interest rate hikes (with another due in December) and bearish speculator sentiment have been insufficient to spark a dollar rally. Instead, the currency has been weighed down by Congress’ inability to get bills passed and weak inflation. Both assumptions will be heavily tested this week. On Thursday, we’ll see Core PCE figures (the Fed’s preferred measure of inflation) while the Senate tax vote is likely to take place later this week.
Don’t celebrate tax cuts just yet
With a 52-48 majority in the Senate, the Republican tax bill is far from a ‘done deal’. Beyond the issue of a slim majority, the current tax plan suffers from poor optics because of its complexity. As we wrote earlier, most Americans will find it difficult to be persuaded of the tax bill’s merits. Instead of choosing to cut tax rates across the board, the GOP has proposed a series of changes to existing deductions and tax bands. The problem with this approach is that many Americans will see an increase in Federal income taxes, creating many losers in the process. As Republican Senators grapple with the proposal, some will find it difficult to support the bill in its current form. Based on a report in the Wall Street Journal, Ron Johnson has publicly opposed the bill while several Republican senators have yet to endorse the document.
Following recent state elections in Virginia (where Democrats won the ballot) and accusations against Roy Moore (a Republican Senator from Alabama), Republicans look vulnerable. If Democrats win Alabama, the GOP’s majority in the Senate will fall to 51-49. Thus there is a strong likelihood that Senate Republicans will push to conclude the tax vote quickly. While a sense of urgency would be a good thing under normal circumstances, there is a rising risk that the tax bill will fail to pass the Senate given the inherent weaknesses of the current document.
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