Dollar rides the trade winds, but the real test is still China

Markets have responded well to the first official U.S. trade deal since Liberation Day, with the U.S.-UK agreement giving risk assets a friendly nudge and helping the dollar regain some footing. But while the optics were solid, let’s not pretend this is a game-changer. It’s more a tone-setter than a trade revolution, and the greenback will need more than a handshake across the Atlantic to sustain this bounce—China is still the real prize.

US equities found some lift, thanks to Trump’s softer tone and renewed optimism around upcoming talks with Beijing. The president’s message was clear: if progress is made, tariff relief could be on the table. That’s music to the market’s ears, especially after weeks of positioning stress and headline-induced whipsaws. The S&P responded with a rally, and the dollar tagged along, supported not just by trade optimism but also by a hawkish undercurrent from the Fed.

Still, let’s not get carried away. The 10% base tariff structure looks here to stay. Trump confirmed it—flat out. It’s the new floor, and for countries running big surpluses or engaging in “unfair trade,” it could go higher. That’s not easing; it’s recalibration. And yet, markets can live with it. As yesterday’s reaction showed, risk assets can digest a steady 10% tariff world—as long as the rules are clear, and the path forward includes negotiated exemptions, sectoral carve-outs, or TRQs.

That’s what the UK deal offered—a hint that Trump’s tariff policy is evolving into a more flexible, deal-by-deal structure. Preferential auto quotas, steel/aluminum relief tied to broader alignment, and pharma access—these are now the new negotiating levers. For Asia, especially Japan, Korea, and India, this is the playbook: show cooperation, win sectoral relief. Fail to show up? Enjoy the tariff regime.

In the FX space, the dollar’s strength in the back half of the week reflects this pivot. A mix of Fed hawkishness and renewed trade optimism gave USD bulls a much-needed reset. EUR/USD cracked below the 1.1260 technical floor, and now 1.1200 is under pressure. Buyers had been defending that 1.1250–1.1300 range for weeks, but the break signals a marked shift in sentiment—and more trimming of the dollar risk premium that had weighed since early March.

Still, this isn’t a done deal. The greenback’s follow-through depends on the weekend’s U.S.-China talks. If Bessent and Greer walk away from Switzerland with anything close to a framework—or even signals of traction—the dollar could extend gains. If not, this rally might stall, especially if today’s Fed speakers sound more dovish than Powell did earlier this week.

Speaking of the Fed, the only data of note is the April budget balance, but a slew of speakers could shift tone, including doves like Barr and Waller. Waller has recently downplayed tariff-induced inflation, and if more neutral voices echo that sentiment, we could see a modest fade in the hawkish pricing currently built into the OIS curve. Right now, markets have nearly 70 bps of cuts priced by year-end, with the first move seen in September. Any pushback could give the dollar more runway.

The U.S.-UK deal got the dollar moving again—but it’s China that will decide whether it breaks out or breaks down. For now, the market is giving Trump the benefit of the doubt, but talk without follow-through will only go so far. Expect a Friday of positioning tweaks, but the real move comes Monday—once we know whether the Swiss talks deliver substance or just more smoke.

It’s been an interesting week in FX, to say the least. The TWD carry trade unwind sent every conspiracy theorist into a doom-loop spiral about the dollar’s demise—only for it to turn out, at least in the short run, to be little more than a tempest in a teapot.

Sure, the move had echoes of a yen-style unwind—fast, outsized, and momentum-chased—but under the hood, it was idiosyncratic and Taiwan-specific, driven by lifers front-running positioning ahead of rumoured FX trade deal carve-outs and not by any systemic crack in the dollar. There was no broad contagion—just a sharp reminder of what could happen if US bond demand truly fades or if the dollar, even briefly, takes a faceplant. Unlikely—but the warning shot was clear.

We’ve been working the long dollar reversion trade, scooping dips ahead the hawkish FOMC and the expectation that Trump’s rolling wave of bilateral trade deals would finally start to unwind the risk premium baggage that’s weighed the buck down since Trade War 2.0 kicked off. This week, that thesis clicked—hawkish Fed tone met actual framework deals, and the dollar responded accordingly.

But let’s be honest: the easy money on that trade’s been made with USDJPY hitting 146 and EURUSD plumbing 1.1200, although I think the EURUSD could fall further, . I’ve throttled back, and I’m back on the lookout—waiting for the next asymmetric setup with juice.

For now, it’s all about patience. The tape’s hunting for new catalysts, and I’d rather wait for the next tradable misprice than force a squeeze from stale positioning. Let’s see what Asia throws at us next week—there’s more trade theater coming, and this show isn’t done yet.

The view

China’s trade data just rolled out the biggest transshipment smoke screen since Covid-19.

Let’s call it what it is: a reroute masquerading as resilience. Vietnam’s imports from China and its exports to the U.S. both hit post-pandemic records in April—a dead giveaway that Chinese goods are getting a fresh coat of paint before slipping across U.S. borders under a different flag.

This isn’t trade diversification—it’s a transshipment workaround. And it’s happening just as Hanoi is in talks with Washington to reduce its own trade surplus. That’s a diplomatic contradiction begging for a tariff.

The setup is obvious: as Trump’s tariffs bite harder, Chinese exporters are flooding neighbouring markets like Vietnam with parts and finished goods, which are then re-labelled, re-routed, and pushed into the U.S. under preferential access.

But this game has a shelf life.

Watch for a hard acceleration in "country-of-origin" tariffs, coming soon to an ASEAN economy near you. Once the paper trail gets too obvious, the U.S. is going to plug the gap—not just with rhetoric, but with enforcement.

Bottom line: this is China’s attempt to duck tariffs through the side door. But the data just lit up the whole hallway. If you’re long Asian EMFX on export strength, start watching for the trapdoor.