The dollar is soft on concerns that the Trump administration still wants a weaker dollar. The won gained on reports that Korea and U.S. officials discussed FX policy (see below) and that led to broad-based dollar weakness. DXY is trading lower for the second straight day near 100.488 and has given up all its post-China euphoria gains. The yen is outperforming, with USD/JPY trading lower near 145.90 and likely to test the floor of what we saw as a new 145-150 trading range. Elsewhere, the euro is trading higher near $1.1235 and sterling is trading higher near $1.3345. We continue to view any dollar relief rallies with skepticism, which this week’s price action would seem to confirm. Easing trade tensions have removed a significant headwind on the dollar over the short-term, but the medium- and long-term impact on the U.S. economy will be felt in the coming weeks and months.
AMERICAS
The dollar continues to be haunted by ongoing fears that the Trump administration implicitly supports a weaker dollar. There is growing speculation that some trade deals will involve allowing for greater local currency strength, which means a weaker dollar. That theme re-emerged in Taiwan at the start of this month and continues in Korea today (see below). The won quickly strengthened but that spilled over into other currencies as the dollar saw a broad-based sell-off on the Korea news. Indeed, the greenback has given back all of its post-weekend China-related gains and then some.
Tariffs have yet to show up in the April CPI data. Headline came in a tick lower than expected at 2.3% y/y vs. 2.4% in March, while core remained steady as expected at 2.8%. Headline was the lowest since February 2021. Of note, super core (core services less housing), a key measure of underlying inflation, came in at 2.7% y/y vs. 2.9% in March and was the lowest since March 2021. Looking ahead to May, the Cleveland Fed’s Nowcasting model has headline at 2.4% and core at 2.8%.
The tame CPI data will keep the Fed on hold for now. The odds of a June cut have fallen below 10%, rising to around 40% in July and fully priced in for September. Looking ahead, the swaps market is pricing in 75 bp of total easing over the next 12 month, down from 125 priced in last week. The Fed’s cautious guidance offers USD some near-term support. Nonetheless, the fundamental backdrop remains difficult for USD.
EUROPE/MIDDLE EAST/AFRICA
Bank of England officials are sounding more cautious. MPC member Mann said that in order to back more easing, “I need to see the loss of pricing power, I need to see that firms are starting to be much more moderate in setting their prices. There will be some trade diversion that will lead to moderation of import prices in the UK but there’s a lot of margin between the dock and the shelf.” Recall Mann and Pill voted to keep rates steady last week. Indeed, the three-way vote split suggests back-to-back rate cuts are unlikely. Odds of a 25 bp cut in June are around 10%, while the swaps market implies around 50 bp of total easing over the next 12 months, down from 75 bp at the start of this week.
The Riksbank published the minutes of last week’s meeting. At that meeting, the Riksbank kept rates steady at 2.25%, as expected. However, it was a dovish hold as the bank warned that more easing may be in the pipeline after signaling in March that it was done easing. The minutes revealed a mixed appetite for further easing. Deputy Governor Bunge and First Deputy Governor Breman both warned of greater possibility of more rate cuts, while Governor Thedéen was more cautious in that “the current assessment is somewhat in favor of our next step being a policy rate cut but this is far from certain.” Meanwhile, Deputy Governor Jansson noted that “the policy rate is currently at a good level.” The swaps market is pricing in 25 bp of further easing over the next 12 months, down from nearly 50 bp at the stary of this week.
ASIA
USD/JPY has retraced the post-weekend move. After trading as high as 148.65 Monday, the pair is now trading right about where it opened the week near 145.85. We believe trade euphoria had moved this pair back into the 145-150 range but further yen gains will lead to a test of the floor. Bank of Japan tightening expectations have adjusted higher, with nearly 50 bp of tightening seen over the next two years vs. 25 bp last week.
Australia Q1 wage price index ran a little hot. Wage growth came in a tick higher than expected at 0.9% q/q vs. 0.7% in Q4, while the y/y rate came in at 3.4% vs. 3.2% expected and was steady from Q4. The gains were driven by higher public sector wages, which rose 3.6% y/y vs. 2.9% in Q4 and reflected new state-based enterprise agreements. Elsewhere, private sector wages rose 3.3% y/y in Q1, same as in Q4. The market continues to fully price in a 25 bp cut to 3.85% at the May 20 meeting.
Reports suggest the U.S. and Korea discussed currency policies. Unnamed sources confirmed that Korean Deputy Finance Minister Choi Ji-young and US Treasury Assistant Secretary for International Finance Robert Kaproth spoke about currency policies at a May 5 meeting in Milan and will continue to talk. No other details were given but the news feeds into the notion that some trade deals will involve allowing greater local currency strength. This possibility was a big factor in the TWD rally in early May and now that is feeding into KRW gains today.
India is taking a page from China’s playbook with regards to the trade war. India has informed the World Trade Organization that it views U.S. tariffs on steel and aluminum as “safeguard measures” that will adversely impact Indian trade. As such, reports suggest India is proposing tariffs on some US goods in response as it reserves its right to “suspend concessions or other obligations” as a counter measure, citing WTO rules. Elsewhere, Indian officials denied President Trump’s assertion that trade played a part in the ceasefire with Pakistan.
