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Tug-of-War Over the Dollar Continues

Overview: US stocks and bonds recovered from yesterday's sell-off in Asia and Europe. The Swiss National Bank President Schlegel expressed the views of many Americans when he said on Monday that "There is currently no alternative" to US Treasuries, "and it's not foreseeable that there will be an alternative."  The 10- and 30-Treasury yields finished 3-4 basis points lower, stocks closed higher. Yet the tug-of-war continues, and the dollar was sold again in Asia Pacific and Europe today. Among the G10 only the Antipodean currencies are weaker, following Australia's dovish rate cut. Emerging market currencies are mixed. Following the weekend elections, the Romanian leu is the weakest (~-0.75%), while the Polish zloty is the strongest (~0.25%).

After yesterday's US equity recovery, most of the large Asia Pacific bourses rallied. South Korea and India were notable exceptions. Europe's Stoxx 600 managed to settle higher yesterday and is extending those gains today. If it settles higher, it will be the fourth consecutive gain. It has only fallen three times so far this month. US index futures are around 0.20%-0.45% lower. A poor 20-year auction weighed on long-term Japanese bonds, but the 10-year yield rose a little more than one basis point to approach 1.50%. Australia's benchmark 10-year yield tumbled a dozen basis points to around 4.40%. European yields are 1-2 bp lower, while the 10-year US Treasury yield is little changed near 4.45%. Gold is steady, holding above $3200 but below yesterday's high (~$3250). July WTI is little changed near $62. 

USD: The Dollar Index set the session low yesterday in early North American turnover a little above 100.00. It trended higher through the remainder of the session and reached 100.50. The gains were marginally extended in Asia Pacific turnover today before sellers reemerged and in early European activity slipped to through yesterday's low but still held above 100.00. The daily momentum indicators are getting stretched. Afterall, it bottomed a month ago. This week's US data are not key to the markets. US participants seemed to be less swayed by Moody's downgrade, the last of the three large rating agencies to downgrade the US than Asia and Europe. US Treasury Secretary Bessent also warned that some countries may face the same so-called reciprocal tariffs they did in early April. Yet he seems to try too hard to spin the administration's ad hocery into "strategic uncertainty."  Beijing has warned that the new US attempt to dissuade the use of Huawei AI chips was a provocation that undermines recent trade talks and seemed to threaten unspecified retaliatory action. Meanwhile, at least half a dozen Fed officials speak today after five yesterday, including Atlanta Fed President Bostic. The derivatives market consolidates last week's move, which pushed the next Fed cut into Q4 from Q3. For the first time in three months, the Fed funds futures are beginning to question whether two cuts will be delivered this year, as the median Fed projection in March showed. Bostic, for one, suggested he is leaning toward one rate cut this year.

EURO: The euro peaked yesterday near $1.1290 in early North American turnover. It trended lower and reached about $1.1225 in the NY afternoon, holding slightly above the pre-weekend high (~$1.1220). It frayed the four-week downtrend found near $1.1260 yesterday but settled below it. The euro held below $1.1280 today as it consolidates in the upper end of yesterday's range, and below the 20-day moving average, which is not settled above for two weeks. The eurozone's current account jumped by nearly 51 bln euros in March. brings the Q1 current account to about 131.76 bln euros from almost 109 bln euros in Q1 24. It is larger inconsequential today: Q1 GDP is history, and the focus is on the euro being among the most attractive alternatives to the dollar. Yesterday, the EC cut its eurozone growth forecast to 0.9% this year from 1.3% in November. It shaved next year's GDP projection to 1.4% from 1.6%. The risk is that both are optimistic. The median forecast in Bloomberg's survey is for 0.8% growth this year and 1.1% next. The IMF's recently minted forecasts put growth at 0.8% this year and 1.2% in 2026. CPI is seen falling to 2.1% this year from 2.4% last year and to 1.7% in 2026. The IMF's CPI projections are 2.1% and 1.9%, respectively. The ECB's staff will update its forecasts next month.

CNY: The dollar reached a six-day high against the offshore yuan near CNH7.2265 today. It bottomed last week near CNH7.1790. The next notable chart area is CNH7.2350-80. The PBOC set the dollar's reference rate at CNH7.1931 (CNY7.1916 yesterday), the first increase in three sessions and only the fourth higher fix this month. Separately, reports suggest that has been an increased demand for yuan from Chinese exporters and investors. Onshore banks reported the first decline in foreign currency deposits in April from a three-year high in March. Chinese banks matched the PBOC's recent 10 bp cut in the key repo rate and cut the loan prime rates to 3.0% and 3.5% for the one-year and five-year tenors, respectively. After the disappointing April data, pressure is likely building for stronger efforts to support the domestic demand.

JPY: The dollar has been sold to an eight-day low today slightly above JPY144.00. The 20-day moving average is near JPY144.50, and the dollar has not settled below it for two weeks. The JPY144.25 area corresponds with the (50%) retracement of the greenback's gains since the eight-month low on April 22, a little below JPY140. It is meeting resistance near JPY144.50 in the European morning. Poor reception at the 20-year JGB auction sparked a sharp sell-off in long-term Japanese Government Bonds today. The 30- and 40-year yields jumped a dozen basis points to new record highs. The BOJ is also trying to survey the market on how quickly it should reduce its purchases of government bonds. Japan reports April trade tomorrow. Consistent with the seasonal pattern, the surplus is expected to narrow from March. Japan's trade deficit averaged JPY532 bln a month in Q1 25 compared with an average shortfall of almost 620 bln a month in Q1 24. Despite the contraction in Q1 GDP, Prime Minister Ishiba rejected calls for tax cuts and pushed back against calls for additional government spending amid rising borrowing costs. Debt servicing costs about a quarter of the government's annual budget (compared with about 17% in the US).

GBP: Sterling made a marginal new high for the month yesterday, by about 2/100 of a cent. It was greeted by sellers who drove it from a little above $1.3400 to about $1.3345 in the North American afternoon. It recorded an outside up day, trading on both sides of last Friday's range and settling above its high. It is trading in about a half-of-a-cent range below $1.3400 today. The Bank of England's Chief Economist Pill expressed concern that rates are being cut too fast and advocated a more "cautious" approached. He had dissented at the last meeting that cut rates. Households saw a jump in energy and water bills last month and this will see the April CPI jump by around 1%. The median forecast in Bloomberg's survey sees the year-over-year rate rise to 3.3% from 2.6% in March. The core rate may rise to 3.6% from 3.4%. The swaps market sees no meaningful chance of a cut at next month's central bank meeting, and the odds of an August cut are around 75%. The year-end rate is seen near 3.75%, from the current 4.25% target, the upper end of expectations since early April. 

CAD: The greenback eased to a three-day low, slightly below CAD1.3920. It recovered to around CAD1.3965 before stalling. This kept the consolidative tone intact. For the fifth consecutive session, it remained within the range set last Monday (~CAD1.3895-CAD1.4015). So far today, it is confined to a roughly CAD1.3930-CAD1.3970 range. Canada reports April CPI today. The median forecast in Bloomberg's survey is for a 0.2% month-over-month decline, which would be the first decline of the year. There were four months in 2024 that the CPI fell. Even with the 0.2% decline in April CPI, the annualized increase in the first four months of the year would be 3.9%. It fell in the last four months of 2024. The VAT holiday and its conclusion have been the main driver of the rebound. The underlying core measures are expected to be little changed, slightly below 3%.

AUD: The Australian dollar was bid yesterday ahead of today's much-anticipated quarter-point rate cut by the central bank today. The Reserve Bank of Australia's cash target rate now sits at 3.85%. The central bank delivered a dovish cut, as Governor Bullock revealed that the debate was over a 25 bp or 50 bp cut. The central bank reduced its growth and inflation forecasts, and the new projections showed scope for 65 bp Q2 26. The market had discounted a year-end target rate of 3.34% yesterday and cut it to 3.16% today. This year's GDP forecast was reduced to 2.1% from 2.4% and the CPI projection was cut to 3.0% from 3.7%. The Aussie held slightly below yesterday's high (~$0.6465) and was sold to about $0.6410. Since the low was set, it has held below $0.6430 as it consolidates. 

MXN: The dollar remained below MXN19.50 yesterday and sellers pushed it to new seven-month lows late in the session near MXN19.30. Follow-through selling today has seen it dip below MXN19.26. The peso was the best performing currencies in Latam yesterday and so far, this month, it is only being bested by the Argentine peso (2.85% vs. 1.80%). The US dollar settled below its lower Bollinger Band (~MXN19.3560) for the second time in the past four sessions. Still, there is little chart support ahead of the MXN19.00-10 area. Mexico reports March retail sales tomorrow. A slight increase is expected. Wednesday's CPI report for the first half of May be more important. The headline CPI is expected to rise to 4% for the first time this year. The core rate may edge a little closer to 4%, which is the upper end of the target range (for both the headline and core rate: 3% +/- 1%). Banxico meets next on June 26 and the officials held out the possibility of a the fourth consecutive 50 bp rate cut. 


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Tug-of-War Over the Dollar Continues Tug-of-War Over the Dollar Continues Reviewed by Marc Chandler on May 20, 2025 Rating: 5
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