The dollar index (DXY00) on Friday rose by +0.21%, and edged to 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 boost tariffs on Canada and other US trading partners risk stoking inflation pressures that could keep the Fed from cutting interest rates, a supportive factor for the dollar.
Late Thursday, President Trump said a 35% tariff on some Canadian products would take effect on August 1, up from the current 25%. The new Canadian tariffs would not apply to goods traded within the rules of the US-Mexico-Canada Trade Agreement, and a lower 10% tariff would be kept on some energy-related imports. He also said he plans to impose blanket tariffs of 15% or 20% on most US trade partners.
The markets are discounting a 7% chance of a -25 bp rate cut at the July 29-30 FOMC meeting.
EUR/USD (^EURUSD) Friday fell by -0.10%, holding just above Thursday's 2-week low. Dollar strength weighed on the euro.
However, the euro had underlying support after German bund yields jumped on hawkish comments from ECB Executive Board member Schnabel, who said, “The bar for another ECB interest rate cut is very high, and there would only be a case for another rate cut if we saw signs of a material deviation of inflation from our target over the medium term. And at the moment, I see no signs of that.”
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) rose by +0.82%, with the yen falling to a 2.5-week low against the dollar. Ramped-up tariff threats by President Trump weighed on the yen due to concerns that higher US tariffs will undercut the Japanese economy and prevent the BOJ from further tightening monetary policy. Higher T-note yields were also bearish for the yen. However, the yen had some support from rising Japanese government bond yields after the 10-year JGB bond yield on Friday climbed to a 5-week high of 1.522%.
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.
