All Eyes on Taxing the Rich as U.S. Embraces New Administration

While former Vice President Joe Biden returned to the White House with a record number of ballots, Federal Reserve Chair Janet Yellen was picked to be Treasury Secretary. Traders in financial markets are focusing on their fiscal and monetary policies, hoping to capture the following trends of gold, stocks, bonds and currencies as well as the degree of economic recovery. Among these forex issues, what concerns me most is whether the US dollar will reverse in the wake of their return.

The dollar should have rebounded since the DXY has bottomed out after Democrats captured control of the Senate, and since Yellen has made clear at a Senate confirmation hearing that the US does not seek a weaker dollar. But it slid on hearing Yellen's claim that she would oppose any and all attempts by foreign countries to artificially manipulate currency values to gain an unfair advantage in trade. Yellen also called for a hefty stimulus package and said she would examine the prospect of longer-term debt issuance, which leaves traders in the worries of additional fiscal burdens. Although Yellen has pledged to raise taxes sharply, traders decided not to go long on the dollar amid disappointments on the unpredictable launch and the unclear rate.

There is a general consensus among financial markets that the US economy will see a vigorous recovery under the leadership of Biden and Yellen. Traders, however, are worried that the economic revival will come at the expense of the fiscal deficit, which will weigh on the dollar. The key factor determining the dollar's future direction is how many taxes will Biden and Yellen increase on corporations and wealthy Americans. A more-than-expected tax hike will dispel misgivings about an increasing fiscal deficit, sending potential gains to the dollar. Another factor involving the dollar's reversal is the degree of the country's economic recovery. If the US recovers faster than other industrialized countries, chances are the Fed will exit the market earlier than other central banks. In the case of big tax hikes, the retaliatory economic rally may bring chances for the Fed to exit the market, putting the dollar on the track of a powerful rally.

Biden signed seventeen executive orders his first day in office but left Trump's tax plan still on the table, which missed the market expectation. In general, the dollar will decide its direction according to Biden's practice. He pledged to tax the rich more and substantially raise the minimum wage. If there is a serious dilution of the promises, the dollar will suffer from further losses. On the contrary, a retaliatory rally in the dollar is foreseeable, with sharp corrections in commodities and non-U.S. currencies on the cards.