The dollar is steady in the wake of the new tariff round. DXY is trading flat near 97.474 as 14 nations got letters announcing new tariff rates that were largely close to those announce in April (see below). Despite this week’s dollar bounce, we believe US protectionist trade policies will continue to weigh on USD. The euro is trading higher near $1.1730, while sterling is trading lower near $1.3580. USD/JPY is trading higher near 146.40 despite higher JGB yields at the super-long end (see below). AUD is outperforming after RBA delivered a hawkish surprise (see below). While the dollar is enjoying a small measure of stability now, we believe the fundamental dollar downtrend remains intact. With recent US data coming in soft, we expect markets to start pushing back harder against the Fed’s hawkish hold. Market repricing of Fed easing along with weaker data and fading risk off impulses should keep the dollar under pressure. Higher tariffs also raise stagflation risks, which is also dollar-negative. Similar to what we saw during Liberation Day, this latest round of tariffs should trigger the next leg down in the dollar.
AMERICAS
President Trump announced the first round of new tariffs. As of this writing, the White House sent letters to 14 countries outlining the new ‘reciprocal’ tariff rates they will be subject to from August 1. They are as follows: Japan (25% vs. 24% previously), South Korea (25%, no change), Malaysia (25% vs. 24% previously), Kazakhstan (25% vs. 27% previously), Tunisia (25% vs. 28% previously), South Africa (30%, no change), Bosnia (30% vs. 35% previously), Indonesia (32%, no change), Bangladesh (35% vs. 37% previously), Serbia (35% vs. 37% previously), Cambodia (36% vs. 49% previously), Thailand (36%, no change), Laos (40% vs. 48% previously), and Myanmar (40% vs. 44% previously). As of July 7, the overall US average effective tariff rate is estimated at 17.6%, the highest since 1934 and up from 2.4% in January.
Tariff collections will begin August 1, allowing a little over three weeks to negotiate them lower. Treasury Secretary Bessent had alluded to this earlier when he said that some countries will have the option of a three-week extension to negotiate a deal. It’s worth stressing that these tariff levels are not based on any economic analysis. It’s also worth noting that after a “deal”, Vietnam’s tariff rate was set at 20% vs. 46% previously. While not as high as feared, 20% is still a significant rate. The situation remains very fluid.
Higher tariffs should push out Fed easing expectations even further. Right now, odds of a September cut are around 70% and 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 last week. FOMC minutes will be released tomorrow and will be closely watched for how much the looming tariffs figured into the discussions. We expect the Fed to remain concerned about potential tariff pass-through into inflation. However, we know at least two Fed officials (Waller and Bowman) would prefer to cut rates sooner rather than later and so the minutes may pick up some of this debate. That said, it’s clear that most Fed officials are comfortable staying in wait and see mode, even more so now.
Former Fed Governor Warsh seems to be auditioning for Chair. In an interview, Warsh said he has sympathy for President Trump’s frustration over Fed policy and added that interest rates should be lower. Warsh said tariffs are not inflationary. Governor Kugler’s term as Governor ends in January 2026 and so whoever replaces her is likely to be tipped as Chair when Powell’s term ends in May 2026.
NFIB small business optimism steadied in June. Headline came in as expected at 98.6 vs. 98.8 in May and remains well below the December peak of 105.1. NFIB Chief Economist Dunkelberg noted that " Small business optimism remained steady in June while uncertainty fell. Taxes remain the top issue on Main Street, but many others are still concerned about labor quality and high labor costs."
New York Fed June inflation expectations will be reported. 1-year expectations are expected at 3.1% vs. 3.2% in May. In May, expectations fell across all three horizons. 1-year inflation expectations declined by 0.4 ppt to 3.2%, 3-year expectations declined by 0.2 ppt to 3.0%, and 5-year expectations declined by 0.1 ppt to 2.6%. With higher tariffs looming, we suspect inflation expectations will start to move higher in the coming months.
EUROPE/MIDDLE EAST/AFRICA
The eurozone is getting another member. While the ECB and European Commission had already signaled last month that Bulgaria met the requirements to adopt the euro, the European Parliament is expected to formally approve its membership beginning in 2026 and refer the matter to the group of finance ministers. Bulgaria will be the 21st member of the eurozone and the first to join since Croatia in 2023. It’s worth noting that since the eurozone crisis, the group has only gotten larger.
ASIA
Super long-term JGB yields are soaring again. This is due in part to concerns over fiscal expansion ahead of Japan’s Upper House elections July 20. 30 and 40-year JGB yields rose as much as 13 bp, coming within striking distance of their May 22 highs of 3.17% and 3.68%, respectively. Rising JGB yields are pushing up Japan’s debt servicing costs, limiting the BOJ capacity to tighten and posing a headwind for JPY. The swaps market is pricing in less than 40% odds of a 25 bp rate hike by year-end and 50 bp of total tightening over the next three years.
Japan reported May current account data. The adjusted surplus came in at JPY2.818 trln vs. JPY2.581 trln expected and JPY2.307 trln in April. However, the investment flows will be of more interest. The May data showed that Japan investors turned net buyers of U.S. bonds (JPY2.872 trln) after two straight months of net selling. Japan investors also turned net buyers of both Australian bonds (JPY214 bln) and Canadian bonds (JPY11 bln) after two straight months of net selling. Investors also became net buyers of Italian bonds (JPY112 bln) after one month of net selling. Overall, Japan investors turned total net buyers of foreign bonds (JPY4.287 trln) after two straight months of net selling. This was the largest month of net buying since August 2024 and so we believe it’s still too early to say that Japan investors have stopped chasing higher yields abroad.
Reserve Bank of Australia delivered a hawkish surprise and kept rates steady at 3.85%. The bank was widely expected to cut rates 25 bp to 3.60%. The RBA noted that “it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis.” More RBA cuts are in the pipeline, but the threshold for additional easing is higher. The RBA noted the recent monthly CPI data “were, at the margin, slightly stronger than expected” and that “various indicators suggest that labor market conditions remain tight.” Moreover, the RBA voted by a solid majority of 6-3 to hold rates steady. There were no new economic projections associated with this policy-setting meeting. The next Statement on Monetary Policy will be published at the August 12 meeting. By then, we’ll have seen June employment and Q2 CPI reports. That data will steer near-term rate expectations. Despite today’s hold, the swaps market is still pricing in nearly 100 bp of total easing over the next 12 months. For now, a less dovish RBA bodes well for AUD.
