Trump Healthcare Defeat Pushes Dollar to 4-Month Lows
After the healthcare defeat, the US Administration will need to regain lost authority quickly to regain market confidence in its economic agenda. Economic indicators generally have been of secondary importance over the past few days with most market attention focussed on the unfolding US political drama.
A key election pledge of President Trump was to repeal and replace the US Affordable Care Act, commonly known as Obamacare. The new Administration drafted new legislation with the help of senior Congressional Republican figures with the Act then due to be voted on in the House last week.
Democrat members were united in their opposition to the Act and there were concerns surrounding the legislation among both the more hard-line and moderate Republican members. In simplistic terms, the more conservative members wanted tougher conditions while the moderates were concerned over the number of people that would lose benefits.
Compromise efforts to appease one camp undermined support elsewhere and the estimates continued to suggest that the Republicans did not have enough support to pass the legislation. President Trump demanded that the Act was put to a vote on Friday but, late in the US session, the legislation was withdrawn due to a lack of support. The dollar weakened in an immediate reaction, although it actually regained ground to end higher on the day with Wall Street indices only marginally lower.
The limited initial reaction was due to Trump’s statement that the Administration would drop healthcare reform for now and concentrate on tax reform. This was extremely important as the gains in equities and strong dollar following Trump’s election were based on the premise that fiscal stimulus and tax reform would boost the US economy and also increase the likelihood of more aggressive Federal Reserve tightening.
If the Administration could now focus on tax reform, the potential for a deal within the next few months would potentially improve. Over the weekend, there was a generally more negative assessment of the situation, especially with recriminations between the Administration and senior Republicans.
There is no doubt that the White House’s Authority has been weakened by the defeat and it will be more difficult to gain support for tax reform even though the Republican Party in general is strongly in favour of lower taxes. Vested interests will inevitably push their positions more strongly on expectations of securing concessions.
It is also important to note that there were major tensions between senior Congressional Republicans such as House Speaker Ryan and Trump during the election campaign and these wounds will tend to be re-opened.
Weakened authority for Senior Congressional Republicans will also make it more difficult to pass reforms.
If prospects for tax reform and fiscal stimulus are also jeopardised, confidence in the economy would be damaged and expectations of Fed tightening would also tend to be scaled back which would erode dollar support.
There is also an increased risk that any tax cuts would not be offset by stronger spending control which would push the budget deficit sharply higher.
Overall confidence in the Trump agenda has weakened and the dollar fell sharply in Asian trading on Monday. The dollar index fell to a four-month low with USD/JPY testing support near 110.00 and EUR/USD above 1.0850 as GBP/USD hit 7-week highs above 1.2550.
The dollar index is now only just over 0.50% stronger than the level seen on November 9th, the day after Trump’s victory, even though the Federal Reserve has increased interest rates twice in the meantime.
Overall, the Administration will need to re-asset authority quickly to rekindle bullish sentiment on US assets.
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