The dollar is mixed as an eventful week begins. DXY is trading flat near 97.840 despite ongoing tariff noise and attacks on the Fed (see below). We believe confidence in US policymaking will continue to erode. The euro is trading flat near $1.1690 while sterling is trading lower near $1.3490. Elsewhere, USD/JPY is trading lower near 147.25. While the dollar had been enjoying a small measure of stability this past week, we believe the fundamental dollar downtrend remains intact. This week brings major US data that are likely to underscore rising stagflation risks. On top of the data, expect more trade noise and threats to Fed independence, all of which make for a toxic brew for the greenback. Similar to what we saw during Liberation Day, this latest round of tariff noise should herald the next leg down in the dollar.
AMERICAS
The trade threats are growing. President Trump declared 30% tariffs on the EU and Mexico over the weekend, just a day after he put 35% tariffs on Canada. All will go into effect August 1 and so there is still room for a deal of some sort. That said, why would any country enter into a trade deal with the US after seeing how Mexico and Canada have been treated a few years after signing the USMCA? All three of these allies have been negotiating in good faith for months now and so we fail to see how these threats are helping matters.
The attacks on the Fed are intensifying. However, it has taken on a new dimension as administration officials are openly criticizing Powell for the renovation of the Fed’s headquarters in DC. Some are speculating that these officials are building a case for firing Powell “for cause” but we are hard-pressed to justify such a drastic move. Indeed, we felt that the recent Supreme Court decision that specifically noted protections for Powell would have ended any debate in this administration. Any attempts to remove him now would not be taken well by the markets, to state the obvious.
Powell’s potential successors wasted no time in piling on. Former Fed Governor Warsh said that “all this big money on big fancy buildings is just another indication” of how the Fed lots its way. Warsh added that the Fed needs to shrink the Fed balance sheet and cut interest rates. Similarly, National Economic Council Director Hassett said that the Fed “has a lot to answer for” on the renovation cost overruns. Hassett highlighted back in June that the Fed has plenty of room to lower interest rates.
At some point, markets will react to what we see as an ongoing erosion in US policy credibility. That would first be manifested in the dollar, as the FX market is typically the quickest to react. The risk is that a weaker dollar then starts to impact other US asset markets, as investors will start to demand a higher risk premium for what has usually been viewed as the riskless asset. Stay tuned.
EUROPE/MIDDLE EAST/AFRICA
Leading indicators point to a weaker UK job market. In June, the KPMG/REC permanent placement index dropped further into contraction territory at 39.1 vs. 44.2 in May, and its gauge of staff availability rose the most since November 2020 to 66.1 vs. 63.3. The chief executive of the REC said that “Much of that [hiring] hesitation stems from the scar tissue left by the spring tax hikes and fear of further business tax rises.” Bank of England Governor Bailey echoed the comments in an interview this weekend and noted that “I think we’re getting more consistently the story that [businesses], if you take the national insurance change, are adjusting via the labor market.” Labor market data Thursday will be closely watched for confirmation of this deterioration. Sluggish growth, a stalling labor market, and the likelihood of higher taxes could force the BOE to cut the policy rate more aggressively than anticipated. The swaps market sees 90% odds of an August cut and 75 bp of total easing over the next 12 months. In contrast, the ECB’s rate-cutting phase is close to wrapping-up. As such, EUR/GBP has room to edge higher towards 0.8800.
ASIA
China reported firm June money and loan data. New loans came in at CNY2.2 trln vs. CNY623 bln in May, while aggregate financing came in at CNY4.2 trln vs. CNY2.3 trln in May. PBOC Deputy Governor Zou Lan stressed that the bank plans to maintain loose monetary policy and to keep liquidity ample. He added that the bank will closely monitor the impact of measures already implemented and will roll out further stimulus “so as to better facilitate expansion of domestic demand, stabilization of social expectations and stimulating market vitality.” We expect further stimulus in H2.
China also reported solid June trade data. Exports came in at 5.8% y/y vs. 5.0% expected and 4.8% in May, while imports came in at 1.1% y/y vs. 0.3% expected and -3.4% in May. The trade surplus rose to a five-month high of $114.77 bln vs. $112.1 expected and $103.22 bln in May. The data underscore the widening gap between robust external demand and still-weak domestic demand. However, we question whether export growth can remain robust when an all-out trade war is unfolding. Indeed, senior customs official Wang Lingjun noted that “unilateralism and protectionism are on the rise globally, and the external environment is becoming more complex, grim and uncertain.”
Singapore reported strong Q2 GDP data. Growth came in at 1.4% q/q vs. 0.8% expected and a revised -0.5% (was -0.6%) in Q1, while the y/y rate came in at 4.3% vs. 3.6% expected and a revised 4.1% (was 3.9%) in Q1. The Trade Ministry noted that the stronger activity was partly led by “front-loading activities” ahead of the August 1 tariff deadline and noted that “Looking forward, there remain significant uncertainty and downside risks in the global economy in the second half of 2025 given the lack of clarity over the tariff policies of the US.”
The Monetary Authority of Singapore holds its quarterly policy meeting next week. At the last meeting April 14, the MAS loosened policy for the second straight meeting by reducing “slightly” the slope of its S$NEER trading band whilst keeping the width and midpoint unchanged. It noted that “There are downside risks to Singapore’s economic outlook stemming from episodes of financial market volatility and a sharper-than-expected fall in final demand abroad. A more abrupt or persistent weakening in global trade will have significant ramifications on Singapore’s trade-related sectors, and in turn, the broader economy.” With the S$NEER trading near the strong end of its band, we see risks that the MAS will loosen policy again next week.
