Dollar Firm as Markets Await Next Round of Tariffs

July 07, 2025

Win Thin

Trade news is likely to dominate trading ahead of the end of the tariff pause Wednesday; we would expect some deals to be announced right up to the deadline; we believe US protectionist trade policies will continue to weigh on USD
OPEC+ agreed to increase oil production by 548,000 barrels a day in August; ECB doves are starting to worry about an inflation undershoot; Sweden June CPI data ran hot; Israel is expected to keep rates steady at 4.5%
Japan reported weak May cash earnings data

The dollar is firm as markets brace for new tariffs. DXY is trading higher near 97.384 as tariff letters will get sent out today. Despite today’s dollar bounce, we believe US protectionist trade policies will continue to weigh on USD (see below). The euro is trading lower near $1.1725, while sterling is trading lower near $1.3600. USD/JPY is trading higher near 145.45 after soft May wage data (see below). SEK is outperforming after June CPI data ran hot (see below). While the dollar is enjoying a small bounce 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 are coming today and that raises stagflation risks. Similar to Liberation Day, today’s tariff news could be the trigger for the next leg down in the dollar.

AMERICAS

Trade news is likely to dominate trading ahead of the end of the tariff pause Wednesday. President Trump said that he intends to deliver “tariff Letters, and/or Deals, with various Countries from around the World…starting 12:00 P.M. (Eastern), Monday, July 7th.” In parallel, Treasury Secretary Bessent stressed that countries that “don’t move things along, then, on August 1, you will boomerang back to your April 2 tariff level.” Moreover, Trump said he would put an additional 10% tariff on “any Country aligning themselves with the Anti-American policies of BRICS. There will be no exceptions to this policy.”

The situation remains very fluid and we would expect some deals to be announced right up to the Wednesday deadline. EU officials saw progress in trade talks and said the bloc is still working towards the July 9 deadline for a deal. Adding to the overall uncertainty, Treasury Secretary Bessent said over the weekend that some countries will have the option of a three-week extension to negotiate a deal. Similar to Liberation Day, today’s tariff news could
be the trigger for the next leg down in the dollar.

Despite today’s dollar bounce, we believe US protectionist trade policies will continue to weigh on USD for three reasons: First, a higher US effective average tariff rate - currently the highest since 1936 - is a downside risk to US growth and an upside risk to inflation (in other words, stagflation). Second, the ongoing trade war threatens to accelerate the dollar’s declining role as the primary reserve currency as countries reassess their economic dependencies on the US. Third, efforts to narrow the US trade deficit will mean fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities.

The growth outlook is deteriorating. The New York Fed Nowcast model now 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 Friday. Elsewhere, the Atlanta Fed GDPNow model now estimates Q2 growth at 2.6% SAAR vs. 2.5% previously. This model will be updated Wednesday. These latest readings aren't bad but are clearly decelerating after weeks of strength.

EUROPE/MIDDLE EAST/AFRICA

OPEC+ agreed to increase oil production by 548,000 barrels a day in August. Consensus was for OPEC+ to boost crude oil supply for a fourth consecutive month by 411,000 barrels a day. September production levels will be set at the next OPEC+ meeting August 3. Crude oil prices dipped initially on supply concerns before retracing most of their losses.

ECB doves are starting to worry about an inflation undershoot. GC member Centeno warned that “Undershooting is the main risk now. If economic growth is flat in the next couple of quarters, investment doesn’t pick up and inflation remains close to 1%, we will have to do something.” Last week, GC member Villeroy noted that a strong euro “could increase the risk of undershooting our target” and added that “this is a risk we must take into account.” Nagel and Holzmann speak today. The market sees only 5% odds of a cut at the next meeting July 24 and only 25 bp of total easing over the next 12 months.

Sweden June CPI data ran hot. Headline came in at 0.8% y/y vs. 0.4% expected and 0.2% in May, while the policy relevant CPIF came in at 2.9% y/y vs. 2.5% expected and 2.3% in May. CPIF ex-energy came in at 3.3% y/y vs. 2.9% expected and 2.5% in May. The inflation overshoot was most likely due to temporary factors like the higher weight of the volatile international travel component. Regardless, the swaps market slashed Riksbank easing bets in half to price in just one 25 bp cut by year-end that would see the policy rate to bottom at 1.75%. At the last meeting June 18, the Riksbank delivered on expectations and cut rates 25 bp to 2.00% and said “The forecast for the policy rate entails some probability of another cut this year.” The Riksbank is getting to the end of its easing cycle, which bodes well for SEK. The next meeting is August 20 and markets see around 15% odds of a follow-up 25 bp cut then, down from 30% before the CPI data.

Bank of Israel is expected to keep rates steady at 4.5%. At the last meeting May 26, the bank kept rates steady at 4.5% and warned that “Forecasters project that the convergence of inflation to the target range will be later than their assessments prior to the publication of the April CPI.” At the April meeting, bank researchers saw the policy rate at 4.0% in 12 months vs. 4.0-4.25% at the January meeting. Updates to the expected rate path will come at Monday’s meeting. The swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 3.5%.

ASIA

Japan reported weak May cash earnings data. Nominal cash earnings came in at 1.0% y/y vs. 2.4% expected and 2.0% in April, while real earnings came in at -2.9% y/y vs. -1.7% expected and -2.0% in April. The less volatile scheduled pay growth for full-time workers came in two ticks lower than expected at 2.4% y/y vs. 2.5% in April. Clearly, wage growth is not a source of significant inflation pressures given annual total factor productivity growth of about 0.7%. Bottom line: the Bank of Japan will not be in any rush to resume raising rates. The swaps market is pricing in less than 50% odds of a 25 bp hike by year-end and sees 25 bp of total tightening over the next 12 month.

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