Dollar rally falters as trade tensions ease but uncertainty persists
The temporary easing of US-China trade tensions has brought a measure of relief to global markets. A 90-day pause in tariff escalation has marked a turning point in the trade dispute’s most volatile phase, encouraging risk-taking and prompting a rise in US Treasury yields as investors unwind positions in safer assets. However, the US dollar’s initial bounce has quickly faded, weighed down by renewed speculation that President Donald Trump may be leaning towards a weaker currency stance.
Although the dollar initially benefited from improved market sentiment, its momentum has not been sustained. Investor caution remains high, with unresolved concerns over the broader economic fallout from the protracted trade conflict. In the absence of convincing signs of recovery, appetite for further dollar appreciation is limited. Short-term bond yields have inched higher, as expectations for interest rate cuts from the Federal Reserve have softened—markets are now pricing in under 50 basis points of easing for the rest of the year. Even so, longer-dated Treasuries remain susceptible, as US fiscal policy pivots towards tax relief without addressing deficit concerns, which continues to exert upward pressure on yields and downwards drag on the greenback.
Recent US-South Korea trade discussions have reignited speculation that the Trump administration may actively prefer a weaker dollar, potentially nudging other countries to allow their currencies to strengthen during trade negotiations. Historically, a weaker dollar has helped Asian exporters, a dynamic Washington is increasingly eager to counter.
In essence, while the near-term reprieve in dollar pressure is evident, deeper challenges endure. Market participants are watching closely for economic indicators that could confirm whether the earlier strains from the trade war are beginning to filter through. Notably, in currency options markets, sentiment towards the dollar over a one-year horizon is now at its most negative in five years—a clear sign of ongoing unease. With US retail sales figures due out today, traders will be searching for new clues on where the dollar and broader markets may head next.
Pound lifts as UK growth surprises and rate cut expectations shift
The British pound firmed slightly following the release of GDP figures that outpaced forecasts, signalling unexpected resilience in the UK economy. Growth in the first quarter reached 0.7%, exceeding the anticipated 0.6% and significantly improving on the previous quarter’s modest 0.1% expansion. Notably, March recorded a 0.2% rise, outperforming expectations for flat growth and underscoring a steady pickup in momentum. Exports were particularly strong, marking their highest performance in more than two years—though it’s worth noting the figures precede the introduction of “Liberation Day” tariffs.
This upbeat economic snapshot, combined with the persistent wage pressures highlighted in this week’s labour market report, strengthens the case for the Bank of England to maintain its current policy stance for now. Market participants have largely priced out a rate cut at the BoE’s June meeting. Still, attention is shifting to August as a likely window for action, keeping investors attuned to any adjustments in the Bank’s forward guidance.
Euro steadies as softer dollar and policy signals guide markets
In the near term, the euro remains largely at the mercy of external developments. The single currency reclaimed the $1.12 mark yesterday, lifted by a weaker US dollar following a surprise dip in American inflation data and renewed uncertainty around US-China trade relations—even with a temporary 90-day pause in tariffs. Still, EUR/USD continues to trade roughly four cents below its 2025 high, and a meaningful push higher appears unlikely unless the pair can close decisively above its 21-day moving average, currently at $1.1314.
On the economic front, the latest ZEW expectations survey for the Eurozone delivered a more upbeat outlook for May, hinting at improving sentiment around political stability and international trade. However, the accompanying assessment of current conditions remained subdued, underscoring ongoing fragility in the region’s recovery. Market attention now turns to today’s industrial production figures, which could help clarify whether the area is on firmer footing or still grappling with persistent headwinds.
Shifting expectations around European Central Bank policy have also shaped market dynamics. Investors now see the deposit rate ending the year at 1.71%, a modest rise from last week but still below the levels implied in April. A rate cut in June is now seen as highly probable, with odds nearing 85%, as officials attempt to shield the economy from the potential fallout of US trade actions. Commentary from ECB policymakers has been mixed—François Villeroy de Galhau suggested another rate cut could be in play by summer, while Joachim Nagel expressed confidence that inflation is moving closer to the Bank’s 2% goal.
