Dollar and bond yields rise on Trump tax plan
Dollar strength put pressure on emerging market currencies and bonds
US president Donald Trump pauses as he speaks with reporters during his arrival at the White House from Indianapolis, in Washington DC. Photograph: Carlos Barria/Reuters
The dollar and US bond yields rose on Thursday after President Donald Trump proposed the biggest US tax overhaul in three decades and as strong US economic data supported the case for a Federal Reserve rate hike later this year.
The dollar’s strength pressured many emerging market currencies and bonds, helping drag down MSCI’s broadest index of Asia-Pacific shares outside Japan 0.4 per cent to one-month lows. South Korean 10-year yields hit a 2-year high.
In contrast, Japan’s Nikkei rose 0.55 per cent, taking cues from gains on Wall Street, where the Dow Jones Industrial Average rose 0.25 per cent while the S&P 500 gained 0.41 per cent.
Small-cap US shares, seen as benefiting the most from the proposed tax cuts, soared, with the Russel 2000 small-cap index notching a record high, rising 1.9 per cent for its biggest one-day gain in almost six months.
Trump offered to lower corporate income tax rates, cut taxes for small businesses and reduce the top income tax rate for individuals.
Also helping to boost the dollar, the plan included lower one-time low tax rates for companies to repatriate profits accumulated overseas, which analysts say would lead to a temporary phase of sizable dollar buying.
European stock futures suggested gains for those markets too, with FTSE futures up 0.18 per cent and German DAX futures up 0.25 per cent.
Trump’s tax proposal faces an uphill battle in Congress, however, with his own party divided, and the plan already prompting criticism that it favours companies and the rich and could add trillions of dollars to the national debt.
“It is hard to expect this proposal to pass the Congress smoothly. We have to pay attention to how the Republicans will view this,” said Takafumi Yamawaki, chief fixed income strategist at JP Morgan Securities.
“It is possible that the net fiscal spending will be smaller than what the stock markets expect,” he added.
The euro hit a six-week low of $1.1717 on Wednesday as the dollar broadly gained, and last traded at $1.1722, having shed 1.9 per cent so far this week.
The dollar shot up to a 2-1/2-month high of 113.26 yen the previous day before stepping back to 113.08 yen Thursday.
“I don’t see any changes to growth stories in emerging economies so I would assume selling in them will prove temporary, unless yields in the developed world keep rising sharply,” said a senior currency trader at a major Japanese bank.
US bond yields jumped with the yield on two-year notes rising to a nine-year high of 1.49 per cent in anticipation of a rate rise in December.
Comments from Fed Chair Janet Yellen that the Fed needs to continue with gradual rate hikes have cemented expectations for policy tightening by year-end.
New orders for key US-made capital goods grew more than expected in August, helping to boost optimism in the US economy’s outlook.
Yields on longer-dated bonds soared as Trump’s tax proposal stoked worries about fiscal deterioration. US municipal bonds were also sold for the same reason.