The US dollar headwinds are surfacing

Asian markets rallied on Monday, tracking fresh records on Wall Street, while the dollar held gains as Donald Trump’s much-hyped tax cuts moved a step closer to being passed.

The controversial reforms look destined to become the US president’s first major congressional victory as two key Republican holdouts in the Senate decided to back the bill after their demands were met Friday.

The news sent US stocks soaring on hopes the cuts will help fire the already healthy economy and boost company profits.

“The odds of the tax cut legislation getting passed within this year have grown,” Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Institute, told Bloomberg News.

This “will benefit not only the US, but also economies around the globe … allowing investors to anticipate an increase in corporate earnings.”

Tokyo ended the morning session more than one percent higher as a weaker yen lifted exporters, while Hong Kong and Sydney each added 0.7 percent. Shanghai rose 0.2 percent, Singapore climbed 0.1 percent and Manila put on 0.4 percent. Seoul was flat.

On currency markets, the dollar benefitted from the tax hopes, with traders betting they will fan inflation and push the Federal Reserve to hike borrowing costs.

‘Messy situation’

The greenback was sharply up against its major peers compared with its levels in Asia on Friday.

However, Stephen Innes, head of Asia-Pacific trading at OANDA, warned the currency could face headwinds in the new year.

“With the messy situation in Washington and the president’s approval rating waning by the month, it’s difficult to envision the Republicans holding on to the House or the Senate majority, making it virtually impossible to get any Trump proposal passed,” he said.

He added that without the passage of the president’s much-touted trillion-dollar infrastructure spending plan “the US dollar could be a dead duck in 2018”.

Manila Times via AFP

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Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes