USD tanks on concerns that tax bill won't pay for itself - BNY Mellon

Simon Derrick, Chief Currency Strategist at BNY Mellon says the key factor driving USD weakness has likely been concerns that the tax bill will not pay for itself via higher growth.

Key quotes

While it is true that the market remains split about the pace of US rate hikes in 2018, it’s hard to argue that the USD’s poor performance has had anything to do with investor skepticism about the Fed given that 2018 dated Fed funds futures have been declining steadily since early November.

It indicates that the key factor driving USD weakness has likely been concerns that the tax bill will not pay for itself via higher growth. A report by the Joint Committee on Taxation published at the start of December argued that the bill would leave the government facing a revenue loss of about USD 1 tn over 10 years.

This makes an interesting comparison with the situation in the mid-1980s - when concerns of twin deficits saw the USD index fall 47% (from Feb 1985) over the next 34 months. This provides a useful benchmark to compare against the current USD downtrend. The current trend is just 12 months old and has seen the USD index fall by 12%.