The Dollar is wobbling as traders sniff out a dovish green light

The big Asia headline is the ink drying on the US–China trade framework. Both sides have now confirmed the deal in unison—Washington with swagger, Beijing with signature opacity. But make no mistake: this is more than just a diplomatic handshake. It's another shot of adrenaline into already frothy global risk sentiment, and FX markets are responding accordingly.

The dollar’s losing altitude as rate cut chatter in the US starts to shift from "if" to "when." Friday’s incoming PCE print is the next domino—if it lands at 0.1% m/m as expected, it'll crack the door wide open for a July rate cut. Add to that weakening personal spending and you’ve got a recipe for repricing the Fed’s reaction function with some urgency. Markets already see a 25% chance for a July move, and payrolls next week will either seal it or kill it

The euro’s riding high as the primary beneficiary of the dollar’s retreat, carving out fresh ground on the back of dovish U.S. rate repricing. For the ECB doves, it’s a welcome tailwind—every tick higher in EUR/USD trims imported inflation and makes the ECB’s disinflation narrative that much easier to sell. But it’s not all upside. A stronger euro also dulls export competitiveness just as eurozone growth is struggling to find second gear.

Still, markets are leaning into the disinflation theme. With oil prices cooling and soft CPI reads from France and Spain expected to reinforce the trend, traders are circling back to the idea of a 1.5% terminal rate for the ECB. That’s a notable shift—one already bleeding into the front end of the curve, where rate expectations are quietly but steadily getting recalibrated.

In other words, the euro's strength is both an ally and a complication. It’s easing inflation, yes—but also tightening financial conditions through the back door. And if the Fed cuts first, the ECB may find itself stuck between imported relief and domestic stagnation. For now, the market’s willing to run with the former.

Meanwhile, Bunds are treading water just under 2.6%, the ceiling for now, as Germany’s fiscal tension stays backloaded until a spending deal materializes. So while Berlin’s hawks are waiting in the wings, they haven’t been let on stage yet.

As for the looming July 9 tariff cliff—European markets are clocking it, but not flinching. The recent trade truce headlines have poured cold water on volatility, and for now, traders are comfortably priced into the base case: a deadline extension, not a detonator. That view got a quiet nod overnight from the White House, which hinted at flexibility if negotiations remain on track.

In effect, the market’s treating the July 9 trigger more like a checkpoint than a cliff. Positioning reflects confidence that cooler heads will prevail, at least in the near term. But make no mistake—complacency is a luxury that expires fast. Any sign of misalignment between D.C. rhetoric and Beijing's response, and risk assets could snap out of their tariff truce slumber. For now, though, the path of least resistance remains calm—and long.

Bottom line: The path of least resistance in FX still favours the dollar. The dovish Fed drift, a trade war drumbeat shifting toward de-escalation with China, and resilient eurozone disinflation dynamics are all working in sync. Until U.S. data—or more pointedly, the Citi Economic Surprise Index—starts printing consistently to the upside, the dollar remains stuck in a sell-on-strength regime.

The euro continues to ride the wave of dollar weakness, but it's a conditional move—not a conviction trade. EUR/USD has its sights set on 1.20, but that journey hinges more on what happens in Washington than Frankfurt. Today’s flash CPI prints from France and Spain are unlikely to shift the needle much—markets will wait for Germany’s data on Monday before redrawing inflation curves. Oil’s retreat adds another disinflationary feather to the ECB’s cap, and with Governing Council doves like Villeroy and Rehn speaking today, there may be some soft pushback to the recent repricing of eurozone rates.

Still, the euro’s rally isn’t just a function of ECB dovishness—it’s a byproduct of dollar fragility.

That said, mean-reversion traders won’t quit fading EURUSD highs, especially with U.S. equities reasserting their “exceptionalism” narrative. But July cut odds are quietly firming, and with each soft macro print, the greenback edges closer to wearing the FX scarlet letter: high beta to bad news, low reward from good. It's not a capitulation—yet—but the tide is clearly pulling away from the dollar’s favor.

The view

Trade Truce Takes the Edge Off, but Dollar Still Shackled by Policy Risk

At this stage, the slew of trade “deals” being floated isn’t about structural transformation—they’re about optics and avoiding a worst-case tariff scenario. And that’s good enough for markets. The key win here isn’t what’s included in the fine print; it’s what’s been sidestepped: a full roll-out of the tariff barrage announced on Trump’s so-called “Liberation Day.”

Encouraging signals are everywhere. The U.S. sounds upbeat on Europe, with Lutnick giving Brussels a rare bouquet for “excellent” negotiating. A deal with India is reportedly near. And the Treasury just inked an agreement with G7 partners to scrap OECD Pillar Two taxes in exchange for dropping the highly contentious Section 899 from the “One Big Beautiful Bill.”

So, what does all this mean for the dollar? On paper, it should offer support. Tariff escalation fears are fading, Section 899-induced jitters are easing, and the global risk tone has improved. But the dollar’s bounce has been underwhelming. Markets are clearly in “wait-and-see” mode—traders want signatures, not soundbites.

And even if these deals get signed, the underlying ideological tilt of the administration hasn’t changed. The goal remains the same: shrink the trade deficit, and a weaker dollar helps. The greenback’s prior slide was partly a function of unpredictability—and that variable hasn’t gone away.

Add in an improving global growth picture, which lifts non-dollar currencies, and a Fed leaning increasingly toward easing, and it's clear the buck’s upside is still capped. The market’s already pricing two cuts, with chatter building around a third. That’s not a backdrop that fuels a dollar surge.

If Japan gets included in the trade truce sweep, it could be a game-changer for the yen. Despite today’s softer CPI, the BoJ would have a much freer hand to hike if external risks fade. With just 3bps priced for September, the market is vulnerable to a BoJ surprise. USD/JPY still trades well above March 2022 levels, even as DXY has returned to those same levels—leaving room for catch-up.

Bottom line: Trade de-escalation is a positive step, but not a game-changer for the dollar—at least not yet. Policy unpredictability out of Washington and a Fed increasingly seen as a cutter, not a holder, will continue to cap dollar strength. Until the White House produces firm deals and data push back against easing bets, the buck remains a rally-fade play.