Who'd have thunk it ? The Dollar on a roll...

ref : - "Dollar Gains on Rates , US Tax Plan : Stocks Climb : Markets Wrap" , Bloomberg Online

On September 8th the Dollar Index, the trade-weighted measure of the US unit's value against a basket of currencies, traded down to a low of 91.01. At the time EUR / US$ was knocking at the door of $1.21, prospects of another US rate rise this year were in serious doubt, and Korea-inspired safe-haven seeking meant that the Dollar had few friends. Today, the Dollar index is trading at 93.34, EUR / US$ is at 1.1740 and the prevailing wisdom of 2 1/2 weeks ago looks a bit foolish. As regulars will know, we always get a bit nervous when everyone's talking the same way but what fundamentally is behind this relief rally for the greenback, and is it something more than that ?

Some technical traders are suggesting that breaks of significant resistance and moving average lines point to more gains. Well, we'll see about that but putting technicals aside there are reasons for Dollar strength, some more solid than others.

Probably foremost among those this morning is "Fedspeak" ..... If the Fed's decision on Sept 20th to leave rates unchanged and to make a start to gradual "quantitative tightening" next month was absolutely no surprise, the hawkish tone of Fed Chair Janet Yellen's accompanying statement was. She was at it again yesterday, in fact cautioning against tightening "TOO gradually". The CME's measure of the probability of a rate hike in December based on the price of Fed Funds futures, which was down in the low 20s at the start of the month, is at 78% this morning. If that figure suggests that not everybody is convinced yet, it does nevertheless represent a comprehensive turnaround in market opinion. There are a boatload of Fed figures due to speak over the next few days, not all of them of the same opinion as their boss, and it will be interesting to see if they prompt any market reactions.

The Dollar was on pretty good form even before the weekend's German election, where a disappointing result for Chancellor Merkel has brought a bout of EUR / US$ selling. That's seems perfectly reasonable .....beyond their symbolic significance, a substantial representation of right-wing AfD members in the Bundestag won't do anything to help Mrs Merkels European plans. And of course, she's also got to negotiate a tricky coalition with both the fervently pro-EU Greens and the Eurosceptic Free Democrats. But as we said on Monday, if an adverse reaction for an overbought Euro was understandable, it's more questionable whether the German election result will really have longer-lasting effects on the currency (on it's own, that is).

One of the reasons given over the wires this morning for continued dollar strength is a reversal of that safe-haven seeking that we were talking about. Apparently, the N. Korea thing has slipped out of traders' focus for the time being. Really ?? Can that be true ?? Remarkably, it is does seem to be the case. You could be forgiven for suggesting that those traders must have the attention span of a goldfish ..... and since we've often questioned the logic behind the market's ability to quickly put any nerves over nuclear sabre-rattling behind them, we certainly wouldn't refute the allegation. But that's just the way it is.

Perhaps the most interesting factor supporting the Dollar this morning is the focus being put on Mr Trump's tax plans (despite the distraction of his ongoing row with NFL players !). The plans should get an airing later today. It should be said up front that whatever the President comes up with -- and he's assured us that his plans are nothing if not comprehensive -- there's bound to be some trouble getting it through Congress. There could be opposition from the Democrats for example to too much in the way of tax cuts for the wealthy. More worrying than that for Mr Trump is the possibility of fiscal conservatives in his own party rebelling as a result of their fear of what too many giveaways would do to the budget deficit.

But from a market point of view, there's likely to be a good many elements that are both dollar-supportive and just as importantly, likely to make the final draft of legislation : tax code simplification ; a proposal to allow companies to write off capital expenditure for five years ; and a lowering of corporation tax (though Mr Trump's election promise of 15% must be too low to be genuinely realistic) .

If those are Dollar-friendly because of the assumed boost they would give to growth, the capital inflows back to the US that could result from a proposed one-off repatriation tax deal for companies would have more obvious and instant effects.

So it's a big day. Watch closely ..... it's just possible that this is day that Mr Trump will be able to point to pledges that he's actually delivering on.

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