The dollar index rose strongly to a four-month high of 93.35 on Tuesday as US vaccinations and massive stimulus packages boosted inflation expectations and Treasury yields; spot gold tumbled nearly 2 per cent at one point, hitting $1678.55 an ounce, its lowest level since March 8, as yields on the dollar and Treasuries rose. For now, investors are keeping a close eye on the US infrastructure plan, which is scheduled to be announced on Wednesday. U.S. president Joe Biden will outline how he plans to pay for $3 trillion to $4 trillion in infrastructure plans. Political strategists say they also expect to see a proposed tax increase for individuals and businesses at some point, some of which will reverse 2017 tax cuts. The first tax increase is expected next year, but some say the capital gains tax on the wealthiest Americans may soon be raised and the market may be caught off guard.
The dollar rose against major currencies on Tuesday and climbed to an one-year high against the yen as US vaccinations and massive stimulus packages boosted inflation expectations and Treasury yields.
The yield on the benchmark 10-year Treasury note rose to a 14-month high of 1.776% on Tuesday and rose 2 basis points to 1.742% in late trading.
Treasury yields have risen, and US President Joe Biden will outline on Wednesday how he plans to pay for his $3 trillion to $4 trillion infrastructure plan.
"the dollar is benefiting from the acceleration of vaccine rollout and the scale of infrastructure programs that are leading to higher yields," Tempus Inc. said. Said John Doyle, vice president of trading and trading.
The dollar as a safe haven has been fully supported and investors have digested the impact of the explosion of Archgos Capital, a highly leveraged investment fund.
The dollar index rose above 93, with the U.S. market hitting an intraday high of 93.35, its highest level in four months.
The dollar / yen also broke through the 110th mark, reaching 110.375, the highest level since March last year. The dollar is on track to record its best month since late 2016.
Analysts say the yen is also vulnerable to higher inflation expectations in the US than higher yields on long-term Treasuries in Japan and the US. The dollar / yen is usually positively correlated with long-term Treasury yields.
Meanwhile, the euro / dollar fell to 1.1711, its lowest level since early November.
Tougher curbs on the coronavirus in France and Germany have darkened the short-term outlook for the European economy. The widening gap between US and German bond yields put pressure on the euro.
The spread between 10-year US and German government bonds widened the most since January last year.
Investors will keep a close eye on the monthly US non-farm payrolls report on Friday, and Fed policymakers have so far cited the weak job market as a reason for keeping interest rates low.
"in a week when the market is so optimistic about the upcoming jobs data, it seems likely that the dollar will be strongly supported," Jane Foley, foreign exchange strategist at Rabobank, said in a report.
However, the report said that "the market is likely to factor in excessive inflation risks", which means that "we think there is room for the dollar to weaken in the coming months."
Gold prices fell nearly 2 per cent on the back of a stronger dollar and rising Treasury yields, while hopes of a faster economic recovery further dampened demand for safe-haven gold.
Spot gold is now down 1.55 per cent, trading around $1685.10 an ounce, after falling nearly 2 per cent to $1678.55 an ounce earlier in the day, the lowest level since March 8.
"if Treasury yields continue to rise, it does provide some good support for the dollar and push down gold prices," said Edward Moya, senior market analyst at OANDA.
While gold prices may face some pressure in the short term, investors who price inflation concerns could "eventually trigger a gold buying spree", Moya added.
From a technical point of view, the price of [gold] is operating at a key level of $1700. A key support level is $1670, a recent low, while the overall outlook for gold remains moderately bearish, "Carlo Alberto De Casa, chief analyst at ActivTrades, said in a report.
Wall Street is waiting for Biden's infrastructure plan, but it may not be ready for new taxes.
Wall Street is waiting for details of President Joe Biden's infrastructure plan, but it may not like the way Democrats pay for it.
Biden is expected to unveil the first part of his ambitious infrastructure plan in Pittsburgh on Wednesday. The master plan is expected to include funding for traditional infrastructure such as roads, railways and bridges, but also to promote low-carbon future spending through electric cars, advanced batteries and more efficient buildings.
Political strategists say they also expect to see a proposed tax increase for individuals and businesses at some point, some of which will reverse 2017 tax cuts.
The first tax increase is expected to be implemented next year, but some say capital gains tax on the wealthiest Americans is likely to rise soon.
"the market is not ready yet. I have been completely bullish for a year and now the flag is raised, "said Dan Clifton, head of policy research at Strategas. Clifton said he doesn't think all the proposals will be passed, but the wealthiest taxpayers will face higher taxes and companies will pay more taxes on American and foreign income.
It is hoped that the 10-year program will not only boost the economy through infrastructure construction and green spending, but also provide programs such as free community colleges and universal kindergartens to help families.
"I am worried that some of these tax increases must take effect immediately, not in 2022," he said. If you tell investors that interest rates will be 20% for four months in 2021 and will rise to 28% by January 1, 2022, investors will cash in their gains four months before higher taxes. "
Strategists say proposals that could be adopted include raising corporate tax rates by a few percentage points and raising taxes on overseas operations. For wealthy individuals, income tax and capital gains may be increased.
Dividends may also be taxed at a higher rate. Estate duty may also change.
The way capital gains are taxed on the rich is likely to change, with private equity and hedge fund partners particularly affected. If partners make a profit or carry interest from the fund's personal assets, they will be taxed at the capital gain rate (up to 20%).
Biden proposed to close the loophole by imposing a capital gains tax on couples earning more than $1 million at the regular income rate.
"this is really the part of the tax code that concerns the interests of partners," said Ed Mills, a policy analyst at Raymond James in Washington. This threshold is aimed at the rich, not small partnerships. There is a big difference between a two-person legal partnership and a global private equity partner. "
Biden has said there will be no increase in taxes for taxpayers earning less than $400000 a year.
Clifton said that after a compromise, the capital gains tax on the rich is likely to be raised to 28%, rather than the expected top tax rate of 39.6% on ordinary income. The top tax rate was at this level before the Republican tax cuts in 2017.
"in fact, married people who earn more than $400000 a year and currently pay 33 or 37 per cent taxes will be pushed into a range of 35 or 39.6 per cent (the starting tax rate in the highest range is much lower than the level required by existing law)," said Andy Laperriere, head of policy at Cornerstone Macro (Cornerstone Macro). "
