United States
The US dollar stabilized today following yesterday’s surge. North American markets seemed more enthusiastic about the dollar compared to their Asian and European counterparts. President Trump has hinted at potential sectoral tariffs targeting semiconductor chips and pharmaceuticals, which could be announced by August 1. Additionally, more bilateral trade deals are anticipated. While the greenback remains softer against most G10 currencies, it has gained traction against Scandinavian currencies. Emerging market currencies have generally weakened, excluding the Chinese yuan and Mexican peso. The People’s Bank of China has raised the dollar’s reference rate for the third consecutive session, a move not seen for two months. Equities feel the pressure as major bourses in the Asia Pacific region, except Taiwan, India, and Singapore, have declined. Europe’s Stoxx 600 weakened for the fourth straight session, and US index futures are experiencing minor declines. Yields on Japanese 30- and 40-year bonds have retreated, shedding around 10 basis points, while most European benchmark 10-year yields showed slight reductions. An exception is the UK Gilt, which rose a few basis points due to an unexpected rise in June’s Consumer Price Index (CPI). The 10-year US Treasury yield is slightly lower, near 4.47%. After a two-day $31 drop, gold prices have rebounded by about $17, reaching $3341. Meanwhile, August West Texas Intermediate (WTI) crude continued its pullback from Monday’s high of $69.65, dropping to a seven-day low near $66. The US Dollar Index extended yesterday’s 0.6% gain, marking its most significant increase in nearly a month. The index has been on a steady rise since July 2, supported by higher US interest rates and rising expectations in the Fed funds futures market. The index briefly exceeded the 98.25 retracement target and is now consolidating within a narrow range today (~98.45-98.65). Over recent weeks, consumer prices rose, while producer prices are anticipated to ease. A 0.2% increase in both headline and core figures would bring year-over-year rates to 2.5% and 2.7% respectively. June industrial output figures will also be released, continuing the recent pattern of alternating monthly gains and losses. The Beige Book, which has taken on added significance under Powell’s leadership, will be released in preparation for the upcoming FOMC meeting. However, given the low likelihood of a rate change, its impact is expected to be minimal. The earnings season commenced in earnest with several major financial institutions reporting, and the dollar’s decline may bolster the value of foreign earnings.
Eurozone
Yesterday, the euro was sold off and closed below its 20-day moving average, with its five-day moving average dipping below the 20-day for the first time in nearly two months. The euro is experiencing its longest five-day decline since March. After trading below $1.16, the euro has managed to stabilize today, albeit still unable to reclaim the $1.1630 level. The eurozone recorded a seasonally adjusted 16.2 billion euro trade surplus in May. The average monthly surplus between January and May is around 18.9 billion euros, a rise from 17.1 billion in the first five months of 2024. While some analysts believe that larger trade surpluses should lead to currency appreciation, historical trends, including those in China, suggest otherwise. In contrast, countries like the US, UK, and Australia have had persistent trade deficits that don’t always pressure their currencies. Given the relative size of the foreign exchange market and capital flows compared to trade flows, capital movements significantly influence exchange rate dynamics. Often, foreign fixed-income investments are hedged, adding another layer of complexity.
United Kingdom
Sterling’s downward trend continued for an eighth consecutive session yesterday, nearing the June 23 low (~$1.3370). This level is also close to the trendline connecting the January, February, and April lows. Currently, sterling hovers near yesterday’s lows and has met resistance below $1.3420. A break could lead to a move towards the next support area around $1.3330. UK’s June CPI rose more than expected, complicating policy outlooks. June’s headline rate increased by 0.3% (against a 0.1% forecast), pushing the year-over-year rate to 3.6% from 3.4%. The April increase in utility prices amplified these pressures. At an annualized rate, the CPI rose by 6.8%, compared to 2.4% in Q1. Businesses have linked these price hikes to rising payroll taxes and the minimum wage. Core price inflation rose to 3.7% from 3.5%, while inflation in consumer services remained at 4.7%. Despite robust inflation, market sentiments remain confident that below-par growth, with GDP contractions in both April and May, will prompt the Bank of England to act next month, with a high probability of a rate cut and possibly another one in Q4.
China
The PBOC’s strategy to temper the dollar’s decline was supported by the dollar’s recent strength post-US CPI. The greenback recently found support between CNH7.1660 and CNH7.1880. Yesterday, it neared its monthly high, slightly above CNH7.1880, with further resistance at CNH7.20, a level not breached since June 3. Today, the greenback remains contained within yesterday’s range, between CNH7.1785 and CNH7.1860. The PBOC set the dollar’s reference rate at CNY7.1526, the highest since July 8, marking the third consecutive increase in what hasn’t happened since late May.
Japan
Throughout the 11 trading sessions so far this month, the dollar has risen against the yen during seven sessions, with four instances yielding over 1% gains, including yesterday’s. This upward momentum propelled the dollar past the upper Bollinger Band (~JPY148.80). After trading below JPY145 early last week, the dollar briefly surpassed JPY149 yesterday—the highest since early April. The 10-year US Treasury yield neared 4.50% for the first time since June 11, while the 30-year yield exceeded 5% for the first time since late May. The JPY149.40 zone aligns with a 50% retracement of this year’s decline. Today, the dollar paused just below JPY149.20. Initial support lies around JPY148.50, and then at JPY148. The Bank of Japan announced it would offer dollars to Japanese banks using Japanese government securities via a repo facility (Funds-Supplying Operations against Pooled Collateral). These repos are precautionary, aiming to preempt potential disruptions from upcoming dollar-denominated obligations due to what appear to be extensive carry trades (borrowing yen to invest in USD assets). This measure by the BOJ may alleviate pressure on Japanese financial institutions from having to offload Treasuries or scramble for dollar funding. The cross-currency basis swap has slightly widened to approximately -33 basis points, indicating limited current strain and emphasizing the preventive nature of the BOJ’s actions.
Canada
In an environment of a strong US dollar, the Canadian dollar demonstrated relative resilience yesterday, experiencing only a minor loss.
