Overview: Today marks the 54th anniversary of the end of the Bretton Woods agreement that pegged the dollar to gold and other currencies to the dollar. Nixon, who was regarded as among the most conservative presidents of his generation also announced a 90-day wage and price freeze and a 10% surcharge on imports. After some fits and starts, the modern era of floating exchange rates was introduced. Europe wanted little currency movement within its growing trade bloc and after several experiments failed, it opted for a single currency in the late 1990s. The incredible asymmetry of power at the end of WWII made Bretton Woods possible in the first place. The US appears to no longer have the will or power to impose a new Bretton Woods but is too strong to allow others who are too divided to create a new order. One of the early advocates of the “Mar-a-Lago accord," Stephen Morin, will soon be a governor on the Federal Reserve. This was supposed to be a mini-Plaza Agreement (Sept 1985 coordinated and repeated intervention to drive the dollar lower), but what US sees as a success, Japan cringes and China sees worrisome sign of America's strategy, and may have influenced its efforts to have the yuan shadow the dollar.
The greenback is trading with a softer profile today as yesterday's gains are pared. Stronger than expected Japanese GDP has lifted the yen, though the odds of a BOJ hike are slightly less than swaps market had at the end of last month. As is often the case in a soft US dollar environment, the Canadian dollar is the laggard. It is jostling with sterling for the bottom of the G10 currencies today with about a 0.15% gain. Central European currencies and the Mexican peso are leading the emerging market currency complex today. East Asian currencies and the Turkish lira are the weakest. Despite disappointing Chinese economic data, the onshore yuan is trading slightly firmer. The large bourses in the Asia Pacific and Europe have risen today. The notable exception is Hong Kong, and the index of mainland shares that trade there. Bond markets are under modest pressure. The 10-year JGB rose a couple basis points, while European yields are mostly around 2-4 bp higher. News that S&P upgraded India's sovereign credit to BBB from BBB- seemed to have little impact on Indian rates. It is the rating agencies first upgrade of India since 2007 and is now one notch ahead of Fitch and Moody's. The 10-year US Treasury yield is flat, near 4.285%. Gold is consolidating at the lower end of yesterday's range, leaving it off around 1.7% this week, which, if sustained, would be the largest weekly loss since the end of June. September WTI extended yesterday's recovery slightly (to $64.15) before reversing and is now below $63.50. The oil market, in particular, may be sensitive to the outcome of President Trump and Putin's meeting in Alaska today. A joint press conference is expected afterward.
USD: After holding above Wednesday's low yesterday, the Dollar Index was trading firmer ahead of yesterday's stronger than expected PPI. It was bid through Wednesday's high (almost 98.15) to meet the (38.2%) of the losses since Monday's high (~99.30). It is trading softer today but inside yesterday's range. It probably takes a move above 98.50-65 or a break of 97.30 to signify anything of technical importance. There is a slew of US data today: July retail sales, industrial production, import/export prices, business inventories, the August Empire State manufacturing survey, and the preliminary August University of Michigan consumer confidence and inflation expectation survey. Strong auto sales look to have flattered retail sales, but even the measure that excludes autos, gasoline, food services, and building materials appear to have held up. Still anecdotal reports warn of downside risk. Industrial production and manufacturing output is expected to be flat after a 0.3% and 0.1% increase in June, respectively. Import prices may have risen by 0.1% for the second consecutive month. If so, the cumulative change this year would be flat. Since import prices do not include the tariffs, it would suggest that overall foreign producers are absorbing the tax increase, even if there are reports of individual companies or industries that might be accepting narrower profit margins into order to maintain market share. University of Michigan's inflation expectations are expected to remain elevated. Lastly, the June Treasury's International Capital report is due late today. Despite the cries of capital flight of the tariffs or large deficit, the fact of the matter is that the net capital inflows in the first five months of the year (~$682 bln) is more than the first five months of 2023 (~$309 bln) and 2024 (~$95 bln) put together.
EURO: The euro fell by about 0.50% yesterday, its biggest loss since the end of July. At the same time, the US two-year premium over Germany widened for the first time in five sessions. The euro found support yesterday near the 20-day moving average (~$1.1630) and has held above $1.1645 today. The euro is firm in the European morning, probing the $1.1685-90 area. This week's low was set Monday close to $1.1590. Below there initial support is seen near $1.1560, but a break of $1.1520 would undermine the technical tone. The week's high was set Wednesday around $1.1730.
CNY: After falling to its lowest level since July 28 yesterday (~CNH7.1680), the dollar rebounded to a new session high (~CNH7.1830) around midday in NY. It reached nearly CNH7.19 today but is now back to around CNH7.1835. We note that after being inversely correlated with the dollar-yen in April and again in May, the 30-day rolling correlation has been above 0.60 since mid-July. The dollar's recovery against the yen yesterday, seemed to favor the high dollar fix today from the PBOC. After it set the dollar's reference rate at its lowest level since last November (CNY7.1337) yesterday, the PBOC set the fix today at CNY7.1371 today. China reported softer real sector data. Year-over-year retail sales slowed to 3.7% (from 4.8%) and were slowest in five months. Poor weather (hot, rains, and floods), coupled with the government's efforts to rein in excess capacity ("anti-involution" campaign), appeared to have slowed industrial production to 5.7% year-over-year rate from 6.8% in June. The surveyed jobless rate ticked up to 5.2% from 5.0%. The real estate market remains troubled. New and used house prices continue to fall, and property investment has yet to stabilize. Reports suggest Beijing is considering "asking" state-owned enterprises to buy homes. Earlier this week, China announced plans to subsidize part of the interest payments on some consumer loans.
JPY: If Treasury Secretary Bessent's call on the BOJ to hike rates weighed on greenback against the yen initially yesterday, the jump in US rates following the PPI reported overwhelmed it. The greenback recovered from JPY146.20 to almost JPY148.00. However, stronger than expected Japanese growth pushed the dollar back down. It is testing the JPY146.75-80 area in the European morning. Japan's economy grew by 1.0% at an annualized rate in Q2 compared with a 0.4% expansion projected by the median forecast in Bloomberg's survey. The 0.2% contraction in Q1 was revised away. The economy now is said to have expanded by 0.6% in Q1, making it the strongest G10 economy in Q1. The deflator moderated to 3.0% from 3.3%, which was also unexpected. Consumption increased by 0.2%, matching the revised performance in Q1. Business spending improved to 1.3% from 1.0% and inventories that added 0.6% to GDP in Q1 subtracted 0.3% from Q2 growth. Net exports, which were a 0.8% drag in Q1, were net contributors in Q2 (0.3%). Since the beginning of July, the swaps market has ranged from pricing in 10 bp of tightening this year to a little more than 20 bp. It is a little below 17 bp to end the week, up from about 14.5 bp at the end of last week after finishing July slightly below 18 bp.
GBP: On the back of the stronger than expected Q2 GDP yesterday, sterling reached almost $1.36, its best level since July 10. However, the broader dollar recovery after the US PPI sent sterling lower. It fell to about $1.3520, meeting the (38.2%) retracement of this week's rally. There are options for about GBP555 mln at $1.3520 that expire today. Yesterday's low has held today, and sterling is trading firmly in the $1.3560 area. A band of resistance is seen in the $1.3600-30 area. Since the August 1 low, sterling has rallied more than three cents (~3.5%) and it looks stretched in the short run. To sustain the momentum, sterling must settle above $1.3520.
CAD: The US dollar posted a bullish outside up day against the Canadian dollar by trading on both sides of Wednesday's range and settling above its high. In fact, greenback posted its highest settlement this month and nearly reached the (61.8%) retracement of the loss since the August high found around CAD1.3820. However, the US dollar stalled there and has been pushed back below CAD1.3800. The CAD1.3720-40 area looks like solid support now. Existing home sales rose 3.8% in July (2.8% in June). The June manufacturing and wholesale sales, due today, are not typically market movers.
AUD: The Australian dollar initially rose above Wednesday's high yesterday, encouraged by a firm employment report. It approached $0.6570, the best level since July 28. However, as the greenback caught a bid after the PPI, the Aussie reversed and was sold through Wednesday's low (~$0.6515) before finding support slightly in front of Tuesday's low ($0.6480). The Aussie settled below $0.6500 for the first time since August 5. The loss allowed the Australian dollar to nearly met the (61.8%) retracement of this month's rally, which began on August 1. In line with the broadly weaker greenback, the Aussie is near session highs (~$0.6515) in late European morning turnover. There are options for a little more than A$560 mln at $0.6523 that expire today (and nearly A$675 mln struck at $0.6515 that expire early next week).
MXN: The combination of the US dollar broad rally, the jump in US rates, and the sell-off of most emerging market currencies took a toll on the Mexican peso. The greenback seemed poised to move higher after it bounced after setting a marginal new low for the year near MXN18.51 Wednesday. It reached around MXN18.8530 yesterday before stabilizing. It was the largest dollar gain in nearly three weeks. The greenback has been sold into the bounce and is trading around MXN18.73-75 now. A close below the MXN18.68 area would neutralize the constructive US dollar's technical tone. The Brazilian real's price action was similar even if less dramatic. The US dollar was sold to a new low for the year on Wednesday (~BRL5.38) but settled a little above Tuesday's close. Dollar buying yesterday lifted it to almost BRL5.4250. This week's high, set Monday, was near BRL5.46.
Reviewed by Marc Chandler
on
August 15, 2025
Rating:
