Written by the Market Insights Team
Dollar faces mounting pressure
George Vessey – Lead FX & Macro Strategist
The dollar remains notably stretched within the G10 basket, trading over two standard deviations above its long-term average. This context highlights the complexities behind the latest phase of dollar weakness, not merely tied to rate differentials or recession risks, but fundamentally to valuation concerns. Concurrently, the yen and Swiss franc are strengthening amid haven demand, while the euro’s resilience persists, bolstered by stable policies and consistent inflows.
The dollar is expected to face continued pressure due to mounting US growth worries and expanding speculative shorts, potentially funnelling flows into its G10 counterparts. On a broader scale, a weaker US dollar continues to ease global financial conditions, supporting risk sentiment over the long term.
The pause in reciprocal tariffs has only partially mitigated the turmoil in financial markets. Rising Treasury yields coupled with a weakening dollar reflect shifts away from USD assets. With the escalating US-China trade war fuelling global growth anxieties, attention remains fixed on negotiations and prospective central bank actions.
In the next 90 days, significant bilateral negotiations are anticipated. Japan will be the initial focus, with South Korea, Vietnam, and India – key neighboring countries of China – also prioritized. While these negotiations may eventually replace the current 10% universal tariff system, expectations are that the US weighted average tariff (excluding China) will likely remain near its present level.
This ongoing US-China trade conflict also prompts critical questions: How will the US substitute goods previously imported from China? And where will China’s redirected exports find new markets? Until markets achieve greater clarity and confidence, rebounds in risk appetite may continue to be limited in scale and duration.
Tread lightly around the bond market
Kevin Ford – FX & Macro Strategist
Remember Liz Truss, the shortest-serving Prime Minister in UK history? Her political career took a dramatic hit under the pressure of the bond market.
Truss succeeded Boris Johnson in September 2022, unveiling a bold plan to slash taxes and ramp up borrowing in hopes of spurring faster growth. But markets weren’t impressed. Her budget proposal, which would have widened the fiscal deficit, sent shockwaves through the economy. The Pound nearly hit parity with the US dollar, Gilts came under immense pressure, and the pension fund system teetered on the brink of collapse. After just 49 days of battling the bond market, Truss resigned.
Fast forward to today, and the US administration has its sights set on the 10-year Treasury yield. Scott Bessent, Howard Lutnick, and the entire economic cabinet are aligned on pushing the yield down to influence mortgages—and voters. But taming the bond market is no easy feat. Erratic policymaking, constant flip-flops, and inconsistent handling of short-term inflation expectations breed uncertainty. And when uncertainty reigns, the bond market speaks loud and clear. Tread lightly.
The 90-day pause initiated by Trump & Co. appears to echo lessons learned from Truss’s missteps. Acting swiftly, they likely recognized the impact of their strong message to global markets regarding reciprocal tariffs. But the moment arrived when they had to face reality: easing off the gas pedal was essential. Without the pause, markets could have spiraled into collapse, taking midterm ambitions down with them.
So, what’s next? Markets are waiting for President Trump and Scott Bessent to deliver tangible wins amid the chaos. If Trump aims to reduce the trade deficit, his economic team will need to bring key trading allies, such as the European Union and Japan to the table for concise trade agreements that lower effective tariff rates.
For Canada and Mexico, the waters remain murky. In two weeks, Canadians head to the polls to choose their next leader. Until then, there’s little clarity on when USMCA/CUSMA negotiations might resume to pave the way for a revamped trade deal.
Euro emerges as an attractive alternative
George Vessey – Lead FX & Macro Strategist
The euro is experiencing its fastest rally in 15 years, with some FX traders eyeing a move to $1.20. Last week, the common currency reached its strongest level in three years, fuelled by economic uncertainty stemming from US tariff policies, which have cast doubt on the dollar’s traditional haven status.
The euro has emerged as a key beneficiary of the dollar’s weakness, as investors reassess the dollar’s role in the global financial system. President Trump’s tariff rollout and escalation of the US-China trade war have further shaken market confidence. The unexpected multi-standard deviation spike in EUR/USD occurred despite higher US yields and widening real yield differentials between the US and eurozone. This movement has also driven a broad rally across most EUR crosses.
While it’s too early to declare the end of dollar dominance, recent shocks to US economic confidence have created opportunities for the euro as a cheap, liquid alternative. Risk reversal, a sentiment gauge measuring demand for currency contracts, surged last week, with one-week contracts showing the strongest bias toward a euro rally in five years. Volatility also spiked, reaching its third-highest level since 2010.
Meanwhile, on the tariff front, in response to the US administration’s 90-day pause, the European Commission delayed implementing its steel and aluminium countermeasures. However, President von der Leyen warned that if negotiations fail, the EU’s countermeasures will proceed, with preparatory work already underway.
Pound steady after jobs report
George Vessey – Lead FX & Macro Strategist
Sterling continues to flirt with $1.32 versus the US dollar, up over 2% so far this month, though GBP/EUR is down over 2% due to the huge inflows into the common currency. Sterling may find further support from here given the UK’s greater resilience to direct tariffs than the Eurozone. Indeed options traders boosted their bets on how far the British pound will rise over the coming week and month to the highest level since March 2020.
On the macro front, data this morning showed UK wage growth remained sticky in the three months leading to February, but job losses added complexity to the Bank of England’s (BoE) strategy for cutting interest rates amid the economic fallout from US tariffs. According to the Office for National Statistics, pay excluding bonuses increased to 5.9% during this period, up slightly from 5.8% through January. Private-sector wage growth, a key metric monitored by the BoE for underlying inflation pressures, came in slightly below forecasts at 5.9%.
Moreover, the labour market showed signs of softening as employers adjusted to the impact of Labour’s first budget and a bleaker economic outlook. Tax records revealed a significant decline of 78,000 payroll jobs in March, marking the most substantial drop since the pandemic.
These developments leave the BoE navigating a precarious situation, balancing persistently high wage inflation against the growing necessity to support the UK economy, as US trade policies disrupt global markets. With pay growth still exceeding the 3% level required for inflation to stabilize at the 2% target, pressure mounts even as the labour market shows signs of cooling.
GBP/USD up 3.5% in seven days
Table: 7-day currency trends and trading ranges
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 14-17
All times are in ET
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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