The dollar index (DXY00) today is up by +0.07%, and posted a new 2.5-week high. The dollar moved higher due to a slump in stocks, which boosted some liquidity demand for the dollar. Also, President Trump’s threats to impose 30% tariffs on goods from the European Union (EU) and Mexico, beginning August 1, risk stoking inflation pressures that could keep the Fed from cutting interest rates, a supportive factor for the dollar. In addition, hawkish comments from Cleveland Fed President Beth Hammack supported the dollar when she said she wants to see inflation fall further before she would support cutting interest rates.
Over the weekend, President Trump saidthe US will impose 30% tariffs on goods from the EU and Mexico, beginning August 1.
Cleveland Fed President Beth Hammack said she wants to see inflation fall further before she’d support cutting interest rates. She said, “We’re not there yet on the inflation side of the Fed’s mandate and I think it’s important that we wait and see how all the new policies that have been put forward are going to impact inflation.”
The markets are discounting a 7% chance of a -25 bp rate cut at the July 29-30 FOMC meeting.
EUR/USD (^EURUSD) today posted a new 2.5-week low and is slightly lower. President Trump’s threat to impose a 30% tariff on US imports from the EU may slow the Eurozone economy and is bearish for the euro. Losses in the euro are limited after the 10-year German bund yield today rose to a 3.5-month high, which strengthens the euro’s interest rate differentials.
Swaps are pricing in a 2% chance of a -25 bp rate cut by the ECB at the July 24 policy meeting.
USD/JPY (^USDJPY) today is down by -0.04%. The yen recovered from a 3-week low against the dollar and is slightly higher today on strength in Japanese government bond yields. The 10-year JGB bond yield rose to a 3.5-month high today of 1.587%, which strengthened the yen’s interest rate differentials. The yen also strengthened on a Bloomberg report that the BOJ will raise its inflation forecasts at this month’s policy meeting, a hawkish factor for BOJ policy. Today’s Japanese economic news was mixed for the yen after the May tertiary index rose more than expected but May core machine orders fell more than expected.
The yen has been undercut by worries about the upper house election in Japan on July 20. The promises by Japan’s ruling Liberal Democratic Party of cash handouts to voters and promises of lower taxes by the opposition have sparked concerns of fiscal deterioration, which are bearish for the yen.