Dollar set for biggest weekly drop in 4 weeks on tax concerns

The dollar edged higher on Friday as an overnight spike in US Treasury bond yields prompted some investors to buy the greenback after some recent heavy selling.

But the greenback was set for its biggest weekly drop in four weeks as investors were disappointed that a landmark US tax Bill may be delayed until 2019.

“I don't think the markets were very hopeful on the passage of the US tax Bill this week to begin with so the indifferent reaction from markets was very much expected,” said Lutz Karpowitz, an FX strategist at Commerzbank in Frankfurt.

Against a broad trade-weighted basket of currencies, the dollar edged 0.2 per cent higher but was set for its biggest weekly loss until the week ending October 15.

The Senate Republicans' Bill to rewrite the tax code differed from their House counterparts' plan. Like the House version, the Senate's proposal would cut the corporate tax rate to 20 per cent from 35 per cent, but the Senate plan would delay implementation until 2019.

Markets were stuck in recent ranges. Ten-year US yields remain trapped in a 10 basis point range they have traded in all this month, while realised volatility for EUR/USD on a bi-weekly basis is heading towards its lowest levels since late 2014.

Ten-year US yields rose four basis points on Friday to 2.38 per cent but remained some way from a seven-month high of 2.48 per cent hit on October 27.

The delay in the US tax Bill prompted Morgan Stanley strategists to reiterate their bearish US dollar call as the delay will “keep US investment spending lower for longer allowing USD investment flows to find their way out of the US”.

The dollar was flat at 113.53 against the Japanese yen , down 0.6 per cent for the week and well below its eight-month high of 114.737 logged on Monday.

“The overnight move focused on the tax situation in the US and the seeming delay that is going to occur,” for the corporate tax cut, said Bart Wakabayashi, branch manager for State Street Bank and Trust in Tokyo.

“Tax reform is going to remain centre-stage.”

Both plans call for a tax on $2.6 trillion in foreign profits held offshore by US multinationals. The Senate wants that tax to be 12 per cent for cash and liquid assets, and 5 per cent for non-liquid assets. The House had amended its Bill on Thursday, going to 14 per cent and 7 per cent, respectively.

The euro was flat on the day at $1.1639, 0.3 per cent higher for the week and holding above a 3-1/2-month low of $1.1553 plumbed on Tuesday.

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