The Dollar is holding in the defensive

Markets

The Japan‐US trade deal set the tone for global trading yesterday. The agreement including a broad (reciprocal) tariff of 15% with commitments on investment and opening up domestic markets for US exports, was seen as a blueprint for deals with other major trading patterns, potentially also with EU. The prospect of trade uncertainty moving to background triggered a risk rally specially among US trading partners. The EuroStoxx 50 closed 1.02% higher. The S&P 500 (6358.91; +0.78%) finished at a record. Sentiment even was further supported by a FT report after the close of European equity markets indicating that the EU and the US indeed were closing in a trade deal. The headlines also triggered a sharp rise in EMU (and to a lesser extent US) yields. German yields rose between 3.2 bps (2‐y) and 5.6 bps (30‐y). The underperformance at the long end suggests that the topic of fiscal sustainability is still in play. US yields added between 4.7 bps (2‐y) and 1.8 bps (30‐y). LT US yields eased modestly after a decent US 20‐y bond sale. Trade optimism (despite higher US yields) helped non‐USD currencies. DXY extended this week’s decline (close 97.2). EUR/USD finished at 1.177. Cyclical currencies like the Aussie dollar also were well bid (AUD/USD jumped north of 0.66). Even de yen, still haunted by fiscal/political uncertainty, slightly underperformed the USD (USD/JPY 146.5).

Overnight, President Trump indicated that the US base case is for reciprocal tariffs between 15% and 50%. So the floor might be higher than the 10% than some hoped for. For now, these comments don’t dent trade driven market optimism. Most Asian equity indices continue yesterday’s rally. The dollar still trades in the defensive (EUR/USD 1.1775, USD/JPY 146.0). Japanese and US yields also gain modestly. Trade related headlines most likely will dominate market sentiment also today. At the same time, the (US & EMU) PMI’s and the ECB policy decision are also worth keeping an eye on. The EMU composite PMI is expected to hold just north of the 50 barrier (expected 50.7). PMI’s are providing an insight on the EMU eco momentum ‘on the eve’ of a potential US‐EU trade deal. The US PMI is expected to hold at a solid 52.8. Even more than is the case for Europe, we keep a close eye the price indictors in the US PMI. The ECB, after reducing the policy rate to 2% early June, indicated that it was in a good place to assess upcoming developments, including trade risks. This put the bank in data‐dependent wait‐and‐see modus. With recent inflation data coming in close to expectations and no concrete trade deal available, the GC today has every reason to keep that wait‐and‐see approach and not commit on if/when they wat might consider a final easing step for this cycle. The September forecasts will provide the next evaluation point. Yields might continue their (trade‐ related, risk‐on driven) rise. The dollar is holding in the defensive.  

News and views

Japanese PMI’s in July diverged with the manufacturing gauge easing from 50.1 to 48.8 but the services one improving from 51.7 to the second‐highest reading of the year so far at 53.5. The composite figure matched June’s 51.5. Increased services activity was linked to firmer demand conditions and client numbers while lingering uncertainty over future US trade policy was one of the key elements weighing down on the industry. The latter, of course, may be less of an issue in coming readings thanks to the freshly closed trade deal. Services companies recorded a sustained rise in new work while orders continued to decline in the factories. Japanese private firms adopted a more cautious stance regarding hiring, with the weakest increase in 1.5 years. This comes amid lower business confidence for the year ahead, across sectors, hitting the second‐lowest since August 2020 (after April 2025) on trade‐related uncertainty. Input cost inflation eased to the weakest in four years but remained sharp overall on higher labour, fuel and raw material costs. Companies as a result increased selling prices again in July at a solid rate.

South Korea’s economy expanded at a faster‐than‐expected clip of 0.6% q/q in Q2 of this year, bouncing back from a 0.2% contraction in Q1 and bringing GDP 0.6% higher than one year ago. Growth was driven by the services sector (+0.6% q/q), suggesting private consumption at work. Manufacturing grew 2.7% q/q while construction (‐4.4%) and the utility sector (‐3.2%) weighed on the economy. The upbeat numbers Presidentwhich is likely to revise its growth forecasts higher at the next meeting. The Korean won strengthens to USD/KRW 1365.5 this morning with first KRW resistance at 1350 coming closer.

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