## United States
Navigating the global economy and managing capital market volatility has always posed challenges, particularly due to recent uncertainties in Washington. The so-called reciprocal tariffs announced on April 2 were postponed for 90 days just one week later, allegedly to allow for intensive negotiations. However, the Trump administration soon acknowledged its “lack of capacity” to negotiate with everyone simultaneously. Instead, it decided to announce new tariff schedules unilaterally, initiating a second “Liberation Day.” In late May, the US Court of International Trade found that the administration exceeded its authority under the International Emergency Economic Powers Act, although an appellate court upheld the tariffs pending a higher court review. Congress seems unlikely to reclaim the trade powers it has delegated. This unpredictability was further underscored by the doubling of steel and aluminum tariffs to 50% on May 30, effective June 4.
The escalating tariffs between the US and China had morphed into what effectively became an embargo between the two largest economies, threatening to disrupt US supply chains and potentially leading the economy toward recession. The loss of US demand, combined with higher tariffs on outsourced production, negatively impacted China’s economic activity. Despite the 90-day negotiation period, tariffs remain significantly higher than previous levels. This frenetic stockpiling activity led many economists to lower recession probabilities for the US, although concerns persist.
The Peterson Institute estimates US tariffs on Chinese goods average around 51%, with China’s tariffs on US imports at approximately 32.5%. Meanwhile, US tariffs on the rest of the world hover just below 12%, while China’s tariffs on non-US goods stand around 6.5%. While this ceasefire should not be mistaken for peace, it has provided a temporary reprieve in the ongoing trade war.
Before the Sino-American détente in Switzerland, Washington struck a basic trade agreement with the UK—viewed by Beijing as an attempt to exclude China from British supply chains. Subsequently, the US issued a formal warning against using Huawei AI globally, citing it as a violation of US export controls. This assertion irked Beijing, who felt it undermined the recent agreements. Although the US softened its stance, it failed to mollify Beijing, which threatened unspecified retaliation. Additionally, the US announced new controls on jet engine part exports to China, threatened to revoke Chinese student visas, and imposed restrictions on chip design software sales.
As May concluded, US Treasury Secretary Bessent acknowledged stalled talks with China. The Trade Representative office complained about Beijing’s slow approval process for critical minerals and metals. Nonetheless, China’s aggressive trade practices and regional disputes with countries such as Taiwan, the Philippines, Japan, Bhutan, and Nepal have constrained its ability to capitalize on US foreign policy challenges.
China continues to make strides in yuan internationalization. The record issuance of panda bonds last year and a continued shift from dollar-denominated to yuan-denominated lending signifies this progress. These changes, partly driven by cyclical considerations and the desire to de-dollarize transactions, underscore China’s growing influence in global finance.
Simultaneously, the Indian-Pakistani confrontation allowed China to test its evolving military technology, revealing mixed results with its J-10C fighter jets and HQ-9 missile systems. China’s skilled defense sector personnel promise further technological breakthroughs.
The current business climate is mired in uncertainty, characterized by ongoing tariff disputes, policy reversals, and sectoral investigations. The US economy shows signs of modest recovery in the second quarter after a first-quarter dip caused by front-running tariffs. However, concerns remain about labor market disruptions due to government layoffs and slow hiring. The expected decline in tourism and the inflationary effects of immigration curbs pose additional challenges.
While there is speculation about a potential consumer boycott of US brands abroad and a withdrawal of investments from American markets, structural shifts remain inconclusive. Factors like Moody’s withdrawal of its AAA rating for the US and foreign investment shifts suggest cyclical rather than fundamental changes. Observers should exercise caution in drawing conclusions about a capital strike against the US.
The Bannockburn World Currency Index reported modest growth in May, reflecting the sustained appreciation of most currencies against the dollar, despite some underperformance among certain emerging market currencies. The US concluded two initiatives contributing to the dollar’s decline recently: tariffs as a tax on importers, and a narrowly passed budget following Moody’s rating downgrade. Inflation is likely to persist, influenced by the labor market’s direction. Despite bond yields rising, uncertainties surrounding the US provoke higher premiums for holding dollars.
## Eurozone
The euro experienced a rally starting in April, with a significant rise against the dollar. It achieved notable monthly gains, reaching its highest levels since November 2021. Despite temporary volatility due to US threats of tariffs on EU goods, the extension of tariff deadlines assuaged markets. The euro’s strength is largely attributed to its deep and liquid alternative to the dollar, with expectations for further gains. Analysts predict the euro may return to $1.20, supported by Germany’s policy reversal on nuclear power and the anticipated rate cut by the European Central Bank at its June meeting.
## United Kingdom
The British pound reached new heights in late May due to the dollar’s weakness and revised expectations of Bank of England policies. Strong Q1 GDP and rising inflation prompted the swaps market to adjust its forecasts for the year-end base rate. The Bank of England is unlikely to cut rates at upcoming meetings, delaying potential reductions until November. The UK reached trade agreements with the US, India, and the EU, enhancing its post-Brexit landscape. Despite recent gains, the pound may face technical resistance but could still progress toward $1.3650.
## China
Contrary to expectations of a yuan depreciation to counter US tariffs, the yuan strengthened recently. The Chinese government prefers a stable yuan, gaining a competitive edge in the current weak dollar environment. The People’s Bank of China reduced rates and reserve requirements, seeking to stimulate domestic demand. However, high tariffs and supply chain exclusions from the US continue to challenge China’s economy. Consumption has been rising steadily, though investment also increases, leading to overinvestment concerns. Chinese businesses prioritize market share over profits, contributing to economic complexities.
## Japan
The dollar’s downtrend against the yen ended in May, with the dollar showing slight gains against the yen. The US 10-year yield rose for the first time in several months, impacting Japanese bond yields. The US-Japan 10-year differential remained stable, and Japanese officials aim for a trade deal with the US before the 90-day tariff postponement concludes.
## Canada
Canada’s elevated core inflation reduced the likelihood of Bank of Canada rate cuts in June. Despite broader economic concerns and the disruptions caused by US policies, Canada’s economy showed resilience. The Canadian dollar continued to strengthen, approaching levels not seen since last October, suggesting further potential gains.
## Australia
In May, the Reserve Bank of Australia reduced its cash target rate, yet the Australian dollar rebounded, approaching the year’s high. The futures market foresees further rate cuts, contingent on upcoming economic data. Technical analysis indicates the potential for the Australian dollar to reach levels between $0.6700 and $0.6750.
## Mexico
Mexico’s economic strategy faces challenges due to shifting US trade policies, which threaten remittances and economic stability. Despite economic stagnation and high inflation, the Mexican peso demonstrated resilience. Further gains are anticipated, driven by carry trades and technical potential toward MXN19.00.
This landscape reveals the complexities and evolving dynamics each region faces in today’s interconnected global economy.
