Geneva truce wobbles, section 899 clouds Dollar's safe-haven halo

Market wrap

Asian equity markets are broadly in the red today as investors trim risk exposure amid a renewed flare-up in U.S.-China tensions. What started as posturing is now veering dangerously close to a breakdown in the fragile truce announced on May 12. After President Trump accused Beijing on Friday of breaching the Geneva de-escalation framework, China hit back hard this morning—denying any wrongdoing and instead pointing the finger at Washington for shifting the goalposts.

Beijing’s counteraccusation highlights new U.S. measures on AI chip export controls, expanded restrictions on tech sales, and the abrupt cancellation of several Chinese student visas. The tit-for-tat narrative has sharpened, and with both sides digging in, the political tone is growing more adversarial by the hour. This isn’t just diplomatic shadowboxing anymore—it’s bleeding into market sentiment.

With investors already jittery from tariff headlines and looming Section 899 retaliation risk, today’s developments reinforce the idea that this conflict is no longer just about trade. It’s tech, talent, and trust—all on the line. Unless there’s a high-level diplomatic reset—likely in the form of a Trump-Xi one-on-one—the relationship looks stuck in a volatility loop, with risk assets caught in the crossfire.

In the absence of clarity, risk aversion remains the default trade in Asia. Equities are sliding, and capital is shifting to more defensive postures. Markets aren’t pricing in a clean resolution anytime soon—and that’s a message worth heeding.

Forex

The dollar opens the week on shaky footing as U.S.-China trade tensions creep back into view and the spectre of a “revenge tax” on foreign investors begins to cloud global capital flows. The Geneva truce isn’t dead yet, but both Washington and Beijing are showing signs of fatigue. Trump’s weekend blasts on social media and state-media pushback from China signal mounting frustration over unmet trade commitments. With the deal set to expire August 12, the risk of an early breakdown is rising, and markets are starting to take notice.

The White House added fuel to the fire by doubling tariffs on steel and aluminum and hinting at broader sectoral hikes across chips, pharma, and aerospace. Traders now find themselves back in familiar territory: front-running trade war risk and recalibrating exposure. What’s different this time is the added twist—Section 899. The proposed “revenge tax,” buried in Trump’s latest budget bill, would impose up to a 20% withholding tax on U.S.-sourced dividends, interest, and royalties paid to residents of countries that implement so-called discriminatory taxes like the Digital Services Tax. Europe, India, and parts of Asia are all in the crosshairs.

If passed, this could hit foreign appetite for U.S. assets right where it hurts—by targeting gross income, not net. The Senate will take it up this week, and the market will be watching for signs that the rhetoric translates into legislative momentum. Until there is clarity, dollar bulls will find it harder to justify taking any long positions.

On the macro front, the week’s data calendar could help tip the balance. ISM manufacturing kicks off today, followed by JOLTS on Tuesday and nonfarm payrolls on Friday. The Fed’s Beige Book is expected to be released midweek, and several Fed speakers are anticipated to lean dovish—Waller already did so in Asia overnight. With 53 bps of cuts priced in for 2025, the dollar may struggle to stay afloat unless the data pops. DXY appears vulnerable toward 98.50( or lower) unless ISM or payrolls can deliver a significant upside surprise.

Over in Europe, the euro continues to benefit from the dollar’s soft underbelly. The ECB is widely expected to cut rates Thursday, and tomorrow’s flash CPI is likely to show core inflation drifting back toward 2.5%. Ordinarily, that would cap euro gains. However, with the dollar on the back foot with US tax, trade, and deficit headlines swirling, EUR/USD remains supported.

Markets are also eyeing Thursday’s NATO meeting in Brussels. European ministers may push back harder against Washington’s pressure and spotlight a surge in defense spending, especially as Germany inches toward fiscal expansion later this month. That could add another subtle bid to the euro, even in the face of ECB easing.

EUR/USD has interim resistance around 1.1425-35, and a clean break could set the stage for a run at 1.1500—especially if U.S. data underwhelms or Section 899 chatter heats up. The dollar’s fate this week isn’t just in the hands of US economic data —it’s also caught in the crossfire of politics, policy, and global portfolio risk.