USD: More solid US growth & potential border tax adjustment provide support – MUFG

The US dollar is staging a modest rebound heading into month end after facing continuous selling pressure throughout January notes Lee Hardman, Currency Analyst at MUFG.

Key Quotes

“The last time the dollar index increased for two consecutive day was the first two trading days of the month. The dollar index has found technical support from the 100.00-level in the near-term. Fundamentals also remain supportive for the US dollar. The release today of the latest US GDP report for Q4 is expected to confirm that the US economy returned to more solid growth in the second half of last year following very weak growth in the first half. Leading indicators are sending a more encouraging signal at the start of this year that economic growth could strengthen further during the first half of this year.@

“Business and consumer confidence have both improved since the US election in anticipation of more pro-growth policies under President Trump. Risks are tilted to the upside for US growth in the year ahead which is likely to be stronger than the average rate recorded during the recovery since the global financial crisis which comes in at just over 2%. As a result we believe that it is unlikely that recent US dollar weakness will prove sustainable beyond the near-term.”

“The US dollar has derived support as well from comments made yesterday by White House Press Secretary Spicer. When asked how they intend to pay for wall, he stated that “when you look at the plan that’s taking shape now, using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico, if you tax that USD/50 billion at 20% of imports by doing that we can do USD10 billion a year and easily pay for the wall just through that mechanism alone. The comments provide a signal that the Trump administration is seriously considering implementing border tax adjustment which would be the equivalent of a fiscal devaluation thereby boosting US external competitiveness. If implemented it would increase the risk of an even stronger US dollar which would provide an offset to the fiscal devaluation. In our current FX forecasts we have assumed that a border tax adjustment will not be adopted.”