Under the tax overhaul plans, Corporate America may repatriate billions of dollars from abroad, potentially strengthening the greenback and U.S. dollar-related exchange traded funds.
American companies could funnel as much as $400 billion back into the U.S. as they take advantage of a one-time deal to repatriate foreign earnings and cash held overseas under the new GOP tax plan, reports Ira Iosebashvili for the Wall Street Journal.
As companies repatriate their foreign reserves, the action will typically require selling foreign holdings and buying U.S. dollar-denominated assets, or increase the supply of foreign currencies while raising the demand for U.S. dollar, which would translate to a stronger U.S. dollar against its foreign counterparts.
Bank of America Merrill Lynch projects repatriations could total $200 billion and $400 billion. Subsequently, bank expects the euro could weaken to $1.10 against the USD in the first quarter from its current $1.1863.
Many also anticipate the greenback to appreciate on the back of President Donald Trump and his administration’s fiscal-stimulus and infrastructure spending pledges.
However, some currency traders are warning that this upcoming move may signal an end to the USD’s almost seven-year-long bull market, pointing to potentially tighter monetary policies out of other developed economies.
“There should be some kind of boost to the dollar” from the tax plan, Lee Ferridge, head of macrostrategy for North America at State Street Global Markets, told the WSJ. “But I will be using that as a selling opportunity.”
Investors can also capture the potential strength in the greenback ahead through dollar-related ETFs, such as the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
Additionally, the WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA: USDU) tracks the dollar against a broader group of developed and emerging market currencies in an attempt to outperform the Bloomberg Dollar Total Return Index. That ETF features exposure to emerging markets currencies whereas UUP only measures the dollar against major developed market currencies.
Alternatively, if traders believe the USD rally may be short lived, the PowerShares DB US Dollar Index Bearish Fund (NYSEARCA: UDN), which acts as the inverse or bearish play to UUP, could benefit from any weakness in the dollar.
For more information on currency hedging strategies, visit our currency hedged ETFs category.