USD is little changed as Oil jumps

While there is much consternation from the American pundits and think tanks about China’s shock as it dominates auto manufacturing and value-added manufacturing, the two shocks from the US are more pressing for investors. First, The IEA says this is the biggest disruption in the oil market in history. The war in Middle East is escalating and the disruption has lifted September WTI to its highest level since mid-June and encourages investors and policymakers to look through energy-led decline in inflation measures, like we saw in the US last week and the UK earlier today. The disruption of helium, a byproduct of natural gas and essential for semiconductor fabrication, is also being felt. Second, the US is threatening to replace expiring tariffs (implemented on due “balance of payments” issues) with a new set later this week (claiming violation of “forced labor” standards) and this is after threatening Brazil with 25% tariff earlier this month and a 50% tariff on some Canadian goods threatened this week.  

The US dollar is narrowly mixed against the G10 currencies, and excluding the oil sensitive Norwegian krone, the other currencies for the most part are +/- 0.1%. Benchmark 10-year yields are mostly firmer, while equities are mixed. The economic calendar for North America is light today and the Fed is in the middle of the “quiet period” ahead of next week’s FOMC meeting. Corporate earnings today include Alphabet and Tesla. 

Prices

G10

In quiet turnover yesterday, the euro settled slightly below $1.1400, where options for around 2.9 bln euros expire there today. The lower end of this month’s range is in the ~$1.1360-80 area. The US two-year yield rose for the past four sessions for a cumulative increase of around a dozen basis points and the US two-year premium over Germany widened from a two-month low last week (~138 bp) to around 146 bp now. A move above yesterday’s high (~$1.1430) would help stabilize the technical tone after lower lows have been recorded for five consecutive sessions. 

The dollar rose for the fourth consecutive session against the Japanese yen yesterday and reached a new 40-year high, almost JPY163.25. This has held today. The recent rhetoric about intervention, if necessary, was repeated earlier today. The dollar settled above the upper Bollinger Band (~JPY163.20 today). It is straddling JPY163 in Europe, where options for nearly $1.6 bln expire today. Speculation that the next rate hike could come sooner saw short-term Japanese rates rise today and the swaps market now has about an 83% chance of a hike discounted in October, up from less than 60% at the end of June. 

Sterling fell for the fourth consecutive session yesterday. It is the longest slump in two months. It was also offered against the euro, where it suffered one of its largest losses since mid-May. The 10-year Gilt yield reached a two-month high yesterday, seemingly a shot across the bow of the new government. Sterling was sold to a five-day low near $1.3360 yesterday. It is holding so far today despite the soft CPI report. That area holds the 20-day moving average and the (50%) retracement of sterling’s rally from the year’s low (June 24, ~$1.3140). A break could spur a move toward $1.3300 next. 

A widening of the US two-year premium over Canada and the new threat of 50% tariffs on an estimated $20 bln of US imports from Canada pressured the Canadian dollar lower yesterday. The US two-year premium jumped nearly seven basis points yesterday and almost six on Monday. At 143 bp, it reached a new high since May 2025. The US dollar pushed to about CAD1.4110 and met the (38.2%) retracement objective of this month’s pullback. It is consolidating in quiet turnover today between about CAD1.4085 and CAD1.4110. The next hurdle is seen in the CAD1.4125-55 area. Options for around $635 mln at CAD1.4075 expire today.

The Australian dollar traded firmly yesterday but the upside stalled late in the European morning, slightly above $0.7025. It pulled back in North America and settled slightly below $0.7000. Today, the Aussie is struggling to re-establish a hold above $0.7000. The high is a little below $0.7015. Although it has held above $0.6990, it looks vulnerable. A return to Monday’s low (~$0.6965) is a risk. 

EM 

Disappointing Mexican May retail sales (-0.6% vs. median forecast in Bloomberg’s survey for a 0.1% increase) stalled the peso’s gains after it reached a three-day high. The greenback straddled the MXN17.40 level for most of the North American session. It spent little time below MXN17.40 today and looks poised to move above yesterday’s high (~MXN17.4375). After weakening in the previous two sessions, the Colombian peso retook the leadership of emerging market currencies yesterday, with around a 0.7% gain. The Colombian peso reached its best level since early 2020 late last week when the US dollar approached COP3200. 

The dollar fell to a new low for the month yesterday against the offshore yuan (~CNH6.7635). The three-year low was recorded on June 17, near CNH6.7540. The greenback is trading with a firmer bias and reached CNH6.7760 today, slightly shy of Monday’s high (~CNH6.7785). The PBOC set the dollar’s reference rate at CNY6.7933 (CNY6.7917 yesterday). 

Rising oil prices helped the US dollar extend its gains against the Indian rupee today. The dollar reached INR96.5760 and settled slightly below there. It reached its highest level since the record was set two months ago, near INR96.9650. A trendline drawn off the lows from late June and early July comes in today around INR95.90 and INR96.10 at the end of this week. 

Other markets

Yesterday’s rise in the Nasdaq was the largest this month. This coupled with Beijing’s efforts to support local equities, has had limited spill-over today. Large bourses in the Asia Pacific region were mixed, though Taiwan and South Korean markets advanced. Europe’s Stoxx 600 is advancing for the second consecutive session, while US index futures point to a lower opening. Alphabet and Tesla report earnings today. 

Benchmark 10-year yields are firmer today. The 10-year US Treasury yield settled above 4.60% yesterday for only the third time this year. The high for the year was seen on May 19, slightly below 4.69%. It is near 4.63% now. In the past three sessions, the 10-year breakeven (the difference between the conventional yield and the inflation protected security) has risen by about three basis points and the expected year-end Fed funds target rate rose almost three basis points. Between the two, they seem to account for the bulk of the rise of the 10-year yield. Asia Pacific yields were mostly 2-3 bp higher and European yields are 1-2 bp higher as many are pushing to new three-month highs today. 

Gold rose by about 1.5% yesterday, its largest advance since July 2 (disappointing US June jobs growth was reported that day). The yellow metal reached slightly through $4084, s six-day high. Good buying emerged on the pullback in the North American morning to a little below $4045, but sellers blocked the upside on the move back above $4080. Follow-through buying today has lifted gold to almost $4142 but has pulled back to a little under $4120 in late European morning turnover. Silver jumped 4% yesterday, which was its biggest advance since June 11. The session high was recorded in the European morning (~$59.25). On the nearly $1 drop in the North American morning, buyers re-emerged. Silver stalled a fraction of a cent below $60 today and is finding support in Europe near $59. 

September WTI rose another 2.25% yesterday after rising around 5.3% in the previous two sessions. The contract briefly traded above $85. The $84.55 area corresponds to the (61.8%) retracement of the decline from the contract high from May 18 (~$95.30). It has reached $88.60 today and is up almost 4.5% in late European morning activity. There is a band of congestion that extends to about $90. 

Data

The UK reported June CPI edged up by 0.1%, and this allowed the year-over-year rate to slipped to 2.6% from 2.8%. The core rate was steady at 2.6%. It is the third consecutive month that core prices rose less than 3% year-over-year. They had been rising faster than 3% since the end of Q3 2021. Services prices, which remain sticky, pulled back to 3.6% from 3.7%. Lower energy and food prices, coupled with heavy discounting on clothes, were reported. Among the first initiatives of the new government was to eliminate the VAT on electricity, which is estimated to be worth about GBP45 per household this year. The government said it will pay for the break by scrapping the previous government’s plan to create a national digital ID. However, an official in Starmer’s government said that the ID program was not funded. 

Japan reported a larger than expected JPY407 bln June trade deficit. Deviating from the powerful seasonal pattern, it deteriorated from the JPY392 bln shortfall in May. Although the yen is undervalued by various metrics, it has not translated into a trade surplus, but the deficit is shrinking. The average monthly deficit in H1 25 was about JPY393 bln and averaged about JPY169 bln in the first six months this year. Exports have risen 19.3% year-over-year, while imports have risen 25.4% year-over-year.