December 20, 2017 / 12:59 AM / 7 months ago

Dollar slides as U.S. tax bill seen having limited impact

NEW YORK (Reuters) - The dollar retreated against most currencies except the yen and Swiss franc on Wednesday, with the greenback seen having limited upside potential given that investors have already factored in a comprehensive U.S. tax bill that is all but certain to be signed into law by President Donald Trump.

FILE PHOTO: A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

“The U.S. dollar and FX markets more generally have largely been unfazed by the tax bill even though the U.S. is embarking on the biggest overhaul of the tax code since 1986,” said TD Securities in a research note.

“This leads us to believe that FX has largely priced in the passage of the new legislation,” it added.

The U.S. Senate approved the tax bill early Wednesday morning, while the House of Representatives gave it final approval, passing it for the second time in two days after a procedural foul-up forced another vote.

The bill essentially slashes taxes for corporations and the wealthy, while offering mixed, temporary tax relief to working individuals and families.

Some analysts though have remained skeptical about the tax bill’s supposed positive impact on the U.S. economy.

While increased fiscal stimulus could lift inflation, allow the Fed to raise interest rates at a faster pace, and support the dollar, it could also expand fiscal deficits with little incentive for businesses to hire more workers, said Omer Esiner, chief market analyst at Commonwealth FX in Washington.

“It remains unclear how much fuel this bill will provide to the economy at this point in the business cycle.”

In late trading, the dollar index fell 0.1 percent to 93.309 . That led the euro to rise 0.3 percent versus the dollar to $1.1879

Year-end portfolio moves and a rise in German bond yields also helped the euro, analysts said.

Vincent Deluard, global macro strategist at INTL FCStone in San Francisco, believes the euro could reach $1.30 in 2018. He believes the proceeds from the European Central Bank’s quantitative easing program were invested by euro zone banks in U.S. Treasuries.

“The euro should appreciate massively once financial flows normalize,” Deluard said.

The dollar also fell against sterling and the Australian, Canadian and New Zealand dollars.

Against the yen , however, the dollar rose to one-week highs and was last at 113.39 yen, up 0.5 percent.

Gains in the dollar were limited versus the yen, as the market looked to Thursday’s outcome of the Bank of Japan’s two-day policy meeting for clues to whether it will join the Federal Reserve and European Central Bank in winding back stimulus.

Graphic: World FX rates in 2017 - tmsnrt.rs/2egbfVh

Reporting by Gertrude Chavez-Dreyfuss; Editing by David Gregorio and James Dalgleish

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