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Big Tax Breaks Mean Big Dollar Gains?

Currency investors are currently debating the merits of a proposed plan to allow a tax holiday for big US multinationals that could see money pour back into America, potentially boosting the dollar.

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In 2005, a similar policy called the Homeland Investment Act saw as much as $350 billion repatriated by US firms, boosting the greenback.

“The FX market has understandably focused on this as a potential support for the USD much like in 2005. Should another corporate tax holiday happen now, the likely repatriation flows would be larger than in 2005,” David Bloom, the global head of FX strategy at HSBC in London, wrote in a research note.

Big obstacles to a deal on repatriation remain but Bloom believes the debate of the debt ceiling will not go away.

“The current legislation faces fairly stiff resistance in Congress, and appears unlikely to progress into law," he wrote.

"Still, with many items being considered in the current debt ceiling negotiations, and pressure on Congress to address ongoing economic weakness, efforts to promote the tax holiday will continue on Capitol Hill, and in so doing they will garner the attention of the FX market.” “If another tax break is confirmed, the announcement would be dollar positive,” Bloom said.

“However, let’s keep in mind that current conditions in the US and the global economy, as well as the drivers in the FX market, are very different now from 2005, making it more difficult for the dollar to benefit from repatriation flows in the same way it did in 2005,” he added.