Dollar Firm as Markets Await Next Round of Tariffs

July 07, 2025
  • 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.

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