Will dollar reach new heights? This depends on Trump’s words

24.02.2017 07:30|Conotoxia.com

What Donald Trump says to Congress on February 28 may be crucial to the dollar’s quotations. In the speech planned for that day, the US president will present changes to the fiscal policy assumptions that will reflect in the budget project for the coming year. The income and spending plan for the next 10 years will also be presented in the coming days – Marcin Lipka, Cinkciarz.pl senior analyst.

Marcin Lipka, Cinkciarz.pl senior analyst

In their initial speeches in front of the joint chambers of Congress, the American presidents have traditionally set forth the basic elements of the economic policy of the new administration. On Tuesday, will President Donald Trump repeat the promises that he made during his campaign?

Let’s recap the complex plan of changing the taxes laid-out by Trump and the Republicans. They regarded, among other things, lowering the number of income tax thresholds from 7 to 3. People who earn over 400 thousand USD per year will benefit the most from the promised reforms. The state burdens related to the capital profits are also to be reduced.

A lower fiscal burden was also promised to the companies where the income tax, according to the plans of the president, are to fall from 35% to 15%. And according to the assumptions of the Republican economic plan entitled ‘A Better Way’ – to 20 percent. The programs of the export and import of goods and services in the USA promotion (Tax Limit Correction) that accompany them, or the plan to repatriate the income earned abroad by American companies, also appeared in the campaign of the Conservatives. What is also worth paying attention to is the announcement of putting one trillion dollars over the next decade for infrastructural investments.

Is history a guidepost?

Over the past few weeks, instead of a media discussion on the fiscal policy, there was a lot of news regarding immigration. The participants of the market started to wonder what part of the promises from the campaign will be fulfilled. Trump’s speech next week in the Congress and the coming budget plan for the fiscal year 2018 (starting in October 2017) is essentially the last call to address the pre-election promises.

If there are announcements of tax changes for households and companies in Trump’s speech next Tuesday, the chances of them being carried out are relatively high. When analyzing the first manifestos of the past American presidents after accepting their nominations, (available on the website of the California institute USCB - The American Presidency Project), it becomes clear that the plans were addressed in reality.

Ronald Reagan’s speech on February 18, 1981 - which was largely dedicated to economic issues - caused income taxes for the richest to reduce from 70 to 50 percent since 1982. For those who earn the least, it was reduced from 14 to 12 percent (according the archive data of the American Internal Revenue Service).

During Reagan’s second term of office the tax reduction was even deeper. In 1988 there were only two tax brackets left – 15 and 28 percent, which means that the fiscal burden for the richest was limited by as much as 42 percentage points compared to 1981. During the same period, the taxes for those earning the least were reduced by 12 percentage points.

The presidency of George Bush didn’t change taxes significantly, apart from introducing a third tax bracket at the level of 31 percent. However, in Bill Clinton’s first speech in 1993, he announced that 1.2 percent of American who earn the most will pay higher taxes. As a result, the richest group started turning 39.6 percent of their income to the state.

It is worth pointing out that during the presidencies of Reagan and Bush, the Democrats had the advantage in the House of Representatives for the entire term. Also, from the second half of the 80s, Republicans also lost the Senate. Regardless, key changes were introduced. Now, all of Congress is under control of the Republicans, which should make the legislative process and the introductions of the changes suggested during the campaign easier.

Strong influence on the dollar

Reducing the taxes for households is an impulse for consumption. Higher infrastructural spendings, the repatriation of the foreign profits and reducing the regulatory burden for companies is a chance to increase the pace of investments. The export stimulation and less than beneficial import, means that the chances for higher inflation increase. All these elements should favor the economic growth, at least in the short term, and increase the likeliness of a faster than expected increase of interest rates.

Because the changes above are still in the planning stage, a relatively small number of independent analytical facilities estimated their effects on the American economy. This topic was picked up in November by the Organisation for Economic Co-operation and Development (OECD).

This organization’s estimates assumed that the fiscal stimulation will increase the GDP growth by 0.9 percentage points in 2018 to the level of 3.0 percent compared to the previous scenario. The inflation is believed to go up by 0.4 percentage points and reach the level of 2.2 percent. However, this is not what’s most important. The key issues are the estimates of what the interest rates on the market look like - which are determined by things such as treasury bond yields.

According to the OECD models, the yields on 10-year treasury bonds may increase from the present 2.4 percent to 3.6 percent. The difference in the profitability of the bonds of developed countries of a similar creditworthiness is one of the basic impulses to the changes on the currency market. Such a big change in the future interest rates could cause a rapid strengthening of the dollar in the perspective of the months to come.

Crucial days to come

Barack Obama gave his first speech in front of the joint chambers of the Congress on February 24, 2009. In as soon as two days, the budget for 2010 was announced. On the other hand, in 2001, the manifesto from George W. Bush took place on February 27, and the plan of spendings and income of the state wasn’t received by Congress until April 9.

The budget which was presented by Donald Trump, according to Bloomberg, will get to the Capitol around March 13th. During the press conference last Wednesday, these reports were confirmed by the spokesman for the White House, Sean Spicer.

However, taking into account that the economic plans presented in inaugural speeches by presidents usually have an effect on the future budget, we should be able to estimate the scale of fiscal changes by Tuesday. If Donald Trump’s speech to Congress includes mostly campaign promises, then the scenario of a major strengthening of the dollar would become very likely. It cannot be ruled out that in this situation the American currency would reach the level of 4.50 PLN in the coming months.


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