Dollar Weakens on Tariff Overload

July 10, 2025
  • We got another round of tariff letters; Trump also announced an unprecedented use of tariffs to influence politics in another country; FOMC minutes showed ongoing concerns about tariffs; Peru is expected to keep rates steady at 4.5%
  • Norway reported mixed June CPI data
  • JGB yields retraced some of this week’s rise despite below average auction demand; Korea kept rates steady at 2.5%, as expected

The dollar is weaker as ongoing tariff noise takes its toll. DXY is trading lower near 97.414 after Trump released more tariff letters. More importantly, he announced 50% tariffs on Brazil in a brazen attempt to influence politics in another country (see below). Between this and the ongoing arbitrary nature of the reciprocal tariff rates, we believe confidence in US policymaking is likely to take another leg lower. The euro is trading higher near $1.1730 while sterling is trading higher near $1.3605. Elsewhere, USD/JPY is trading lower for the second straight day near 146.15 despite slightly lower JGB yields after a weak 20-year auction (see below). While the dollar had been enjoying a small measure of stability this week, we believe the fundamental dollar downtrend remains intact. The economy is slowing. Haphazard tariff policy will extend the current period of uncertainty, while higher tariffs clearly raise stagflation risks, which is also dollar-negative. Similar to what we saw during Liberation Day, this latest round of tariff noise should herald the next leg down in the dollar.

AMERICAS

We got another round of tariff letters. Starting August 1, imports from the Philippines will face a 20% tariff rate vs. the original 17% reciprocal rate, imports from Brunei will face 25% vs. 24% originally, imports from Algeria will face 30% and is unchanged from the original rate, imports from Libya will face 30% tariffs vs. 31% originally, imports from Moldova will face 25% tariffs vs. 31% originally, imports from Iraq will face 30% vs. 39% originally, and imports from Sri Lanka will face 30% tariffs vs. 42% originally. We know that the original reciprocal tariff rates were calculated in a rather arbitrary manner and the fact that the updated rates remain quite close to the originals means that trade policy is being driven more by politics than economics.

Indeed, President Trump also announced an unprecedented use of tariffs to influence politics in another country. Trump said 50% tariffs on imports from Brazil were “due in part to Brazil’s insidious attacks on Free Elections, and the fundamental Free Speech Rights of Americans.” With regards to charges faced by former President Bolsonaro, Trump said “This Trial should not be taking place. It is a Witch Hunt that should end IMMEDIATELY!” Trump also ordered a Section 301 probe of Brazil, citing the country’s “continued attacks on the Digital Trade activities of American Companies.” President Lula responded that “Any unilateral rate hikes will be responded to using Brazil’s economic reciprocity law. The sovereignty, respect and intransigent defense of the Brazilian people’s interests are what guide our relations with the world.” Of note, Brazil was originally subject to 10% reciprocal tariffs. BRL was hit hard yesterday and losses are likely to continue. Break above 5.6112 would set up a test of the May 30 high near 5.74 for USD/BRL.

FOMC minutes showed ongoing concerns about tariffs. Specifically, “While a few participants noted that tariffs would lead to a one-time increase in prices and would not affect longer-term inflation expectations, most participants noted the risk that tariffs could have more persistent effects on inflation.” Furthermore, “Participants judged that uncertainty about the outlook was elevated amid evolving developments in trade policy, other government policies, and geopolitical risks, but that overall uncertainty had diminished since the previous meeting.” Lastly, “Participants agreed that although uncertainty about inflation and the economic outlook had decreased, it remained appropriate to take a careful approach in adjusting monetary policy.” Overall, there was nothing too surprising as we knew that tariff pass-through was a big concern for Fed policymakers. If the Fed was worried about tariff pass-through last month, we suspect they will be even more worried now. A September cut had been priced in before the data but odds are now around 75% while October is fully priced in. Looking ahead, the swaps market is pricing in 100 bp of easing over the next 12 months after briefly touching 125 bp earlier this month. Musalem and Daly speak today.

Weekly jobless claims will be the only US data report. Initial claims are expected at 235k vs. 233k last week, while continuing claims are expected at 1.965 mln vs. 1.964 mln last week. Of note, next week’s initial claims reading will be for the BLS survey week containing the 12th of the month. There is no Bloomberg consensus yet for July NFP but its whisper number stands at 122k vs. 147k in June. Given underlying signs of weakness in the June NFP, we suspect that 122k is a tad optimistic.

The growth outlook is deteriorating. The Atlanta Fed GDPNow model still estimates Q2 growth at 2.6% SAAR, unchanged from the previous reading. This model will be updated next Thursday. Elsewhere, the New York Fed Nowcast model estimates Q2 growth at 1.6% SAAR vs. 1.7% the previous week and Q3 at 1.8% SAAR vs. 1.9% the previous week. This model will be updated tomorrow. These latest readings aren't bad but are decelerating after weeks of strength.

Peru central bank is expected to keep rates steady at 4.5%. At the last meeting June 12, the bank kept rates steady at 4.5% and noted that “Most indicators and expectations remained in the optimistic range, in a context where economic activity is hovering around its potential level.” However, it warned that “The outlook for global activity has deteriorated as a result of restrictive measures on foreign trade.” Bloomberg consensus sees only one 25 bp cut in H2.

EUROPE/MIDDLE EAST/AFRICA

Norway reported mixed June CPI data. Headline came in two ticks lower than expected and remained steady at 3.0% y/y vs. the Norges Bank forecast of 3.1%, while underlying CPI came in a tick higher than expected and picked up three ticks to 3.1% y/y vs. the Norges Bank forecast of 3.1%. At the last June 18 meeting, the Norges Bank unexpectedly cut rates 25 bp to 4.25% and flagged that “the policy rate will be reduced further in the course of 2025” as “the inflation outlook for the coming year indicates lower inflation than previously expected.” The bank’s policy rate path implies one 25 bp cut to 4.00% by year-end. The swaps market is more dovish and is pricing in nearly 50 bp of easing by year-end. We see room for the swaps curve to adjust higher in favor of NOK.

ASIA

JGB yields retraced some of this week’s rise despite below average auction demand. The 20-year bond sale's average bid-to-cover ratio was 3.15, which was higher than the previous three auctions (3.11 in June, 2.50 in May, 2.96 in April) but below the 12-month average of 3.29. This comes after a solid 5-year JGB auction yesterday. Top Bottom line: the increase in long-term JGB yields is pushing up Japan’s debt servicing costs, which in turn is limiting the Bank of Japan’s tightening capacity and posing a headwind for JPY.

Bank of Korea kept rates steady at 2.5%, as expected. The decision was unanimous and reflected “the significant acceleration in housing prices in Seoul and its surrounding areas and household debt.” Nevertheless, the bank signaled more rate cuts are in the pipeline by noting that “the Board considers it necessary to continue its rate cut stance, given that inflation remains broadly stable and economic growth is forecast to remain low for the time being.” Governor Rhee added that four of the six members of the board were open to a cut over the next three months. The swaps market is pricing in steady rates over the next three months and 25 bp of total easing over the next 12 months that would see the policy rate bottom near 2.25%.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction