USD: Congress versus Trump coming into focus – MUFG

Another reason why the dollar may run out of steam later this year is the potential for optimism related to US economic growth under President-elect Trump to fade expects Derek Halpenny, European Head of GMR at MUFG.

Key Quotes

“The IMF has signalled a likely positive effect with 2017 real GDP growth revised 0.1ppt higher to 2.3% while 2018 growth was revised more notably by 0.4ppt to 2.8%. The IMF did stress a wider than usual probability range due to greater uncertainty with the potential for fiscal stimulus to fuel even stronger growth but also highlighted that tightening financial market conditions could have a greater negative impact.”

“We clearly will have to wait and see what happens in the weeks and months following Friday’s inauguration. We expect much greater focus on comments from Paul Ryan – House Speaker – who in the past has indicated a desire for pursuing a legislative agenda focused on tax cuts and to a lesser degree infrastructure spending. Steps in that direction early on in Trump’s presidency will revive reflation optimism that has faded somewhat since the turn of the year.”

“Interestingly, a Wall Street Journal article (reported as being from Friday but updated at 11:47pm ET yesterday) is getting some attention as it highlights disagreement over House plans for a border tax which Trump called too complicated. The article also cites Trump as claiming the dollar was “already too strong” although this appears in specific reference to USD/CNY. How markets perceive the White House/Congress relationship will be key to shaping expectations on Trump reflation plans proceeding smoothly and the signs so far are not good.”