President Trump’s tax cut proposal and hawkish Fed talk support US dollar

The advance of US stock market and the US dollar index of ICE London exchange continued last week as President Donald Trump announced a tax overhaul proposal. The SP 500 added 0.7% and the ICE dollar index rose 1% for the week.

The SP 500 lost 0.2% on Monday after North Korea tensions flared up as it threatened to shoot down US bombers. The US broad market index posted gains next three sessions, gaining 0.4% on Wednesday after President Trump and Republican leaders presented proposal to cut the top corporate tax rate to 20% from 35%, cut taxes for small businesses and reduce the top income tax rate for individuals as part of an overhaul of the US tax code. SP 500 added 0.1% on Thursday as second quarter GDP was upgraded to 3.1% from 3%. The broad stock market rose 0.4% closing at record high Friday as data indicated core personal consumption expenditure index and personal spending rose 0.1% on month in August.

The ICE dollar index advanced Monday through Wednesday, gaining 0.4% on Tuesday as Federal Reserve chair Yellen said the Fed should be wary of “moving too gradually” as this may result in rising wages, causing accelerating inflation. The dollar index reversed some of the prior session gains on Thursday despite Kansas City Fed President Esther George’s hawkish comment that continued rate hikes were needed to maintain stable growth. The dollar declined 0.1% on Friday notwithstanding Philadelphia Fed President Patrick Harker’s comment he still expects the central bank to raise interest rates in December.

Major economic events this week are: the Reserve Bank of Australia interest rate decision on Tuesday, ADP Non-Farm Employment Change on Wednesday and non-farm payrolls on Friday. Considering the effects from hurricanes Harvey and Irma a decline in non-farm payrolls in September below 100 thousand level is expected.