The dollar’s losses in the North American afternoon yesterday have been unwound as hopes that a framework for negotiations between the US and Iran have faded again. A drone strike on the UAE, ostensibly from Iranian proxies in Iraq, has helped lift oil prices and the greenback. Yet, stocks and bonds are higher. Still, ahead of the long holiday weekend in the US and UK, risk appetites may be limited as the risk of US strike on Iran seems to have risen.
In the US, Warsh will be sworn in as the next Fed chair and at 10:00 am ET Governor Waller addresses the economic outlook. The final University of Michigan consumer confidence report typically does not elicit as much of a response as the initial reading. The US Treasury market closes early today, ahead of the holiday, and liquidity will fall off in the North American afternoon. The US dollar in consolidating in narrow ranges with a slightly firmer bias.
Prices
G10
• The euro was sold to a new marginal low since April 7 yesterday in what appeared to be a response to the stronger than expected US May PMI. It was the only one among the high-income countries that did not fall. The euro slipped through the $1.1580 support area by a few hundredths of a cent. It recovered to about $1.1630 on reports that suggested an agreement between the US and Iran has been struck (again). The euro settled above $1.1600. However, the hopes of an agreement have not been sustained, and the euro is trading with a heavier bias between about $1.1595 and $1.1620.
• Since the BOJ’s intervention on April 30, the yen has strengthened in only three of the 15 sessions coming into today. The dollar rose to a new high for the month yesterday near JPY159.35. It has been capped at JPY159.15 today but has not traded below JPY158.90. We note that the US 10-year premium over Japan is hovering near four-year lows around 180 bp. It was around 290 bp at the end of May 2025. In the first 20 weeks of the year, Japanese investors have sold about JPY3 trillion (~$19.bln) of foreign bonds and bought JPY1.77 trillion of foreign stocks. In the same period last year, Japanese investors bought around JPY4.4 trillion of foreign bonds and JPY8 trillion of foreign stocks. To round out the picture, note that foreign investors have purchased JPY7.5 trillion of Japanese bonds this year and JPY10.7 trillion of Japanese stocks (compared with JPY4.4 trillion of Japanese bonds and JPY334 bln of Japanese stocks in the year ago period)
• Sterling continues to trade within Wednesday’s range, giving little obvious clue to the near-term outlook. It began the week with a test on $1.33, its lowest level in over a month and rebounded to reach nearly $1.3465 Wednesday. Despite the disappointing retail sales and the largest budget shortfall in six years, sterling is trading quietly, in about a quarter-cent range above $1.3415.
• The Canadian dollar fell to its lowest level since April 13 yesterday. The greenback reached CAD1.38, the lower end of a resistance band we identified that extends to about CAD1.3815. The US dollar pulled back and settled slightly below Wednesday’s high (~CAD1.3780). The greenback is firm but has held below CAD1.38.
• The Australian dollar rebounded from a test in the local session on $0.7100 to reach new session highs in the NY afternoon yesterday near $0.7165. The $0.7175-85 area has capped it in recent days. Two G10 currencies appreciated against the dollar since the Middle East war began: The Norwegian krone, which has appreciated by about 3%, and the Australian dollar, which has gained about 0.65%. The Aussie is in a little more than a quarter-cent range above $0.7125 today.
EM
• As risk appetites improve in the North American afternoon yesterday, the Mexican peso traded higher. The dollar peaked on Wednesday before Moody’s downgrade was announced near MXN17.43. By late yesterday, the greenback had eased to a new low for the week near MXN17.26. The dollar has held above MXN17.2960 today and is trading firmly, but well within yesterday’s range.
• The dollar made a marginal new low for the week today against the offshore yuan. It slipped to CNH6.7955. Barring a recovery, it will be the sixth weekly loss for the greenback in the past eight weeks. The PBOC fixed the dollar slightly higher today (CNY6.8373 vs. CNY6.8349). On a weekly basis, the fix has fallen in all but three weeks since the end of last September.
• The central bank’s engineered short squeeze extended the Indian rupee’s gains today. The dollar slumped to INR95.6850, its lowest level in seven sessions. Estimates of the size of yesterday's intervention range from around $2 bln to $5 bln.
Other Markets
• The rally to new highs for the week in the US S&P 500 and Nasdaq set the tone for today’s gains in Asia Pacific and European equities. Nearly all the markets are higher today. The Nikkei led the move in the Asia Pacific region with a nearly 2.7% rise. Taiwan’s Taiex was close with an almost 2.2% rally. Europe’s Stoxx 600 is rising for the fifth consecutive session, for the first time since last November. US index futures are around 0.2%-0.3% firmer.
• Benchmark 10-year yields are mostly lower with the help of the pullback in oil prices and the rally in the US 10-year yesterday. The 10-year US Treasury yield fell to 4.55%, a new low for the week. European yields are 4-6 bp lower. In Europe, the 10-year Gilts yield has dropped the most this week, 19 bp. The US 10-year yield is off about four basis points this week, while the 2.5 bp rise in the 10-year JGB is the anomaly.
• Gold dipped below $4500 support for the fourth time this week yesterday but recovered on the back of the broader rally in risk assets and settled above the previous session’s high for the first time in a couple of weeks. A move above the week’s high, seen Tuesday near $4589, lifts the technical tone. Silver was firmer. The week’s high was set on Tuesday slightly below $79. That is the immediate hurdle. Still, both metals are consolidating with a slightly softer bias so far today.
• July WTI was sold yesterday in the North American afternoon on the optimism that a preliminary deal has been struck between the US and Iran. It was the third consecutive declining session, matching the longest since the Middle East war began. July WTI fell to almost $95.76, a five-day low and briefly traded below the 20-day moving average (~$97 today) for the first time in two weeks. However, the contradictory reports have seen oil trade firmer today. July WTI reached almost $99.45 before but it is pulling back ahead of the North American open and is probing the $98 area late in the European morning,
Data
• As the week draws to a close, the US sees the final University of Michigan survey. Recall that the preliminary results show a record low of consumer sentiment (48.2). It did not fall below 55 during the Great Financial Crisis or below 70 during the pandemic. One year inflation expectations softened in the initial read to 4.5% from 4.7%. It had fallen to 3.4% before war. The 5–10-year inflation projection slipped to 3.4% from 3.5%. It was at 3.3% before the war. The five-year breakeven (the yield differential between the US conventional yield and the inflation protected security is around 2.65%, up about 20 bp since the war on Iran began. The 10-year breakeven is slightly below 2.50%, up around 23 bp during the same time.
• Canada reports March retail sales today. StatCan has indicated that preliminary data point to a 0.6% increase after a 0.7% rise in February. Excluding auto sales, the median forecast in Bloomberg’s survey is for a 0.9% rise after 0.5% previously. Canada reports Q1 26 GDP next week. After contracting by 0.6% in Q4 25 at an annual rate, the economy appears to have returned to growth.
• Mexico is not expected to revise its estimate that the economy shrank by 0.8% quarter-over-quarter in Q1 26. Although the economy appears to be expanding this quarter, the pulse is weak. The IGAE economic activity report, which functions as a monthly GDP report may show the economy stagnating after a 0.11% rise in February. Note that Mexico and the EU hold a summit that will produce a new trade deal.
• Negotiated wage growth in the eurozone slowed to 2.46% from 2.86% in Q4 25. Negotiated wages rose by an average of 2.82% in 2025, down from around 4.5% in the previous two years. Still, the hawks have persuaded the market that the ECB will hike rates next month (~88%).
• Germany’s May IFO survey showed the first improvement since the Middle East war began. The sentiment towards the business climate rose to 84.9 from 84.5. The current assessment rose to 86.1 from 85.4 and the expectations component improved to 83.8 from 83.5.
• The UK reported April retail sales fell. Including gasoline, they tumbled by 1.3%, more than twice the expected fall (median forecast in Bloomberg’s survey was for a 0.6% decline). Yet, the story was mostly about gasoline. Excluding it, retail sales slipped by 0.4%. Unlike most countries, the UK’s retail sales ae reported in volume terms. In the first four months of the year, the headline retail sales rose by an average of 0.1% and the ex-gasoline measure rose by an average of 0.2%. In the first four months of last year, both measures rose by about 0.4% a month. Separately, the UK reported a GBP24.3 bln budget deficit in April, the largest since the pandemic.
• Japan reported softer than expected April CPI. Indeed, the results were weaker than any economist in Bloomberg’s survey anticipated. The headline CPI ticked slipped to 1.4% from 1.5% and the core measures, which is targeted fell to 1.4% from 1.8%. It is the third consecutive month below target. The measure that excludes both fresh food and energy eased for the sixth consecutive month and at 1.9% (from 2.4%), matching the lowest reading since September 2022. Process food prices eased and energy costs eased at a slower pace than in March. The price of rise, which rose 98% in the year through April 2025, is up 0.6% in the past 12 months. Pricing in the swaps market is consistent with about an 80% chance of a hike at next month’s BOJ meeting. The market has almost two hikes this year discounted.
Reviewed by Marc Chandler
on
May 22, 2026
Rating:
