Dollar slips as optimism over tax proposals wanes

Thursday 18.30 BST

What you need to know

  • Dollar index retreats from one-month high
  • 10-year Treasury yield inches towards 2.40 per cent
  • S&P 500 flat after hitting intraday record on Wednesday
  • Brent oil falls for third day, gold bounces off 6-week low


US stocks paused for breath after reaching record levels, and the dollar gave back some of its recent gains, as the markets’ enthusiastic response to the Trump administration’s tax reform framework appeared to falter.

However, the sell-off in medium- to longer-term Treasuries continued, taking the yield on the 10-year note to within a whisker of 2.36 per cent, the highest since mid-July.

Brent oil extended the retreat of the previous two sessions although trading was choppy, while gold edged higher after touching its lowest level since August 16 and base metals were mostly firmer.

Hot topic

the chief focus in the markets remained the expectations for tax cuts, which together with a more hawkish message from the Federal Reserve over the past week, had supported the dollar and weighed on Treasuries.

“The reality has been for some time that tax reform is looking increasingly tough, but that markets were pricing a near-zero probability of anything passing,” said Jim Reid, strategist at Deutsche Bank.

“Such an outcome might still be the case but when expectations are so low any hopes can help the reflation trade.”

Indeed, the US currency rose as high as ¥113.25 against the yen on Wednesday — a 10-week peak — while the euro touched a six-week low of $1.1715.

Yesterday, however, the dollar was back to ¥112.59, down 0.2 per cent on the day, while the euro was up 0.4 per cent $1.1788 and sterling was 0.4 per cent higher at $1.3435. The dollar index, a measure of the currency against a basket of peers, was down 0.2 per cent after hitting its highest intraday level since mid-August in early trade.

“The pause in the dollar rally reflects perhaps investors taking a second look at the proposals and wondering, firstly, whether the overhaul will do any more than provide a ‘sugar high’ for the economy, and — perhaps more importantly — how the massive tax cuts will be financed,” said Shaun Osborne, chief FX strategist at Scotiabank.

“Developed market bonds remain under pressure, however.”

The yield on the 10-year US Treasury was up 2 basis points at 2.33 per cent, after earlier touching 2.359 per cent, according to Reuters data — above its 200-day moving average.

The 30-year US yield was 3bp higher at 2.89 per cent. The 10-year German Bund yield rose 2bp to 0.48 per cent.

The rekindled tax cut hopes helped push the US 10-year break-even inflation rate, which measures the difference in yields of nominal and inflation-protected bonds, to its highest level since early May.

The more policy-sensitive two-year Treasury yield, however, was down 1bp at 1.47 per cent, even after the release of economic data that were moderately positive for the US growth outlook.

Second-quarter GDP growth was revised up to an annual pace of 3.1 per cent from 3.0 per cent. August inventory and trade figures were surprisingly positive, while initial jobless claims rose last week by less than many in the markets had expected, given the impact of recent hurricanes.

Blerina Uruçi, an economist at Barclays said the third estimate of second-quarter GDP had painted a solid picture of the economy.

“We expect growth to slow again in the third quarter to 1.5 per cent following the disruptions from the hurricane season, but reconstruction of the affected areas should boost fourth-quarter GDP — we expect 3.0 per cent growth for the final quarter.”


US equities struggled to maintain the upward momentum that on Wednesday took the S&P 500 to a record intraday high of 2,511.75.

By midday yesterday, the benchmark index was flat at 2,507, as weakness in the financial and technology sectors offset higher energy stocks. The tech-heavy Nasdaq Composite was 0.2 per cent lower.

But across the Atlantic, the Stoxx 600 rose 0.2 per cent to a 10-week closing high, its sixth successive advance. The UK’s FTSE 100 ended 0.1 per cent higher.


Brent oil resumed its downward path, falling 1.2 per cent to $57.23 a barrel. The international crude benchmark hit $59.49 on Tuesday, a 26-month high, as speculation mounted about possible supply disruptions.

Copper, meanwhile, was up 0.5 per cent at $6,472 a tonne on London while zinc was 1 per cent higher.

Gold fell as low as $1,277 an ounce in early trade before rallying back to $1,284, up $4, or 0.3 per cent, on the day.

Additional reporting by Michael Hunter in London and Alice Woodhouse in Hong Kong

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