The dollar index (DXY00) today is up by +0.14% at a 1-week high. The weakness in stocks today has boosted some liquidity demand for the dollar. Also, comments from President Trump that he will start announcing unilateral tariff rates in the coming days on dozens of countries are lifting the dollar, as concerns rise that rising tariffs will boost inflation and prevent the Fed from cutting interest rates.
Gains in the dollar are limited after President Trump signed the reconciliation bill into law last Friday. The nonpartisan Congressional Budget Office estimates that the bill will add $3.4 trillion to US budget deficits over the next decade. The fiscal stimulus from the bill will be a net positive for the US economy, but the higher deficit is negative for the dollar as it increases the risk of an eventual debt crisis in the United States and reduces foreign investor confidence in the United States.
The markets are discounting a 5% chance of a -25 bp rate cut at the July 29-30 FOMC meeting.
EUR/USD (^EURUSD) today is down by -0.37%, mainly due to dollar strength. Also, weaker-than-expected Eurozone economic news is weighing on the euro after Eurozone May retail sales fell more than expected. Limiting losses in the euro is the jump in the Eurozone’s July Sentix investor confidence index to a nearly 3.50 year high, and the unexpected increase in German May industrial production.
The Eurozone July Sentix investor confidence index rose +4.3 to a nearly 3.50-year high of 4.5, stronger than expectations of 1.0.
Eurozone May retail sales fell -0.7% m/m, weaker than expectations of -0.6% m/m and the biggest decrease in 1.75 years.
German May industrial production unexpectedly rose +1.2% m/m, stronger than expectations of a -0.2% m/m decline.
Swaps are pricing in a 6% chance of a -25 bp rate cut by the ECB at the July 24 policy meeting.
USD/JPY (^USDJPY) today is up by +0.88%. The yen fell to a 1.50-week low against the dollar today on concern that higher US tariffs on Japanese exports will hurt the Japanese economy. Also, the rising tariffs may prevent the BOJ from raising interest rates further. Last Tuesday, President Trump said that a trade deal with Japan is unlikely, indicating that the country will likely face a tariff of 30%, 35%, or “whatever the number is that we determine.” Higher T-note yields today are also weighing on the yen.