Written by the Market Insights Team
Dollar struggles amid fiscal concerns and trade tensions
George Vessey – Lead FX & Macro Strategist
The US dollar index remains near 3-year lows, following its worst week in six, as fiscal uncertainty and shifting trade policies weigh on investor confidence. A bear steepening in the bond market – where long-term yields rise more than short-term yields – has further pressured the dollar.
Trade tensions remain front and centre after President Trump delayed 50% tariffs on EU imports to July 9, just days after setting a June 1 start date. His swift reversal, following a call with EU Commission President von der Leyen, suggests the tariff threat was a negotiation tactic. However, Trump’s sharp rhetoric and unresolved trade grievances with the EU signal further escalations remain possible.
This week, attention shifts to Senate debates on Trump’s tax and spending package, which could significantly expand the federal deficit. The Congressional Budget Office estimates the plan may add $3.8 trillion to US debt over the next decade, exacerbating fiscal concerns. With debt servicing now consuming 4.5% of GDP, the highest in the G10, fiscal policy clarity remains critical. If long-term yield uncertainty eases, market concerns may subside, but until then, fiscal risks stay in focus as investors weigh the implications for growth and stability.
The USD’s correlation with US term premia has reversed, meaning higher term premia now aligns with a weaker dollar. This shift suggests markets are reassessing the dollar’s safe-haven appeal, trading it based on US policy concerns rather than traditional risk dynamics. As US fiscal uncertainty grows, investors appear less inclined to seek refuge in the dollar, signalling a notable change in market behaviour.
Meanwhile, investors are also watching key US economic data due today, including durable goods, housing, and consumer confidence. Markets will also closely follow Fed officials Kashkari and Williams, as their comments could offer insights into future monetary policy moves.
Euro flirting with 1-month high
George Vessey – Lead FX & Macro Strategist
The euro hit a one-month high against the dollar, fuelled by the delay in 50% tariffs on Europe, though it’s losing momentum near $1.14. Despite this, the pair is up almost 10% year-to-date and FX options traders remain highly bullish on the euro’s longer-term prospects.
If the tariffs were enforced, EU growth could suffer, pushing the ECB toward more accommodative policy, weighing on the euro. Meanwhile, the Japanese yen may benefit if a US-Japan trade deal includes a JPY appreciation component. Still, ECB President Christine Lagarde raised the stakes, suggesting Trump’s policies could actually create a “global euro moment,” potentially positioning the euro as a co-reserve currency alongside the dollar. At the same time, China continues efforts to boost the yuan’s global role.
Currency traders remain skewed toward euro strength, with one-year EUR/USD risk-reversals hitting their highest level since 2003 (excluding March 2020). However, as well as greater clarity on trade developments, further euro upside would require stronger domestic economic momentum, rather than relying on continued USD weakness to drive gains.
Pound poised for further gains
George Vessey – Lead FX & Macro Strategist
The pound looks poised for further gains, supported by UK economic resilience and hawkish BoE policy, setting it apart from its G10 counterparts. The UK-US trade framework and a recalibrated UK-EU relationship add further tailwinds, reinforcing sterling’s recent outperformance. With solid fundamentals and yield support from the BoE, the pound’s bullish momentum could extend—though market sentiment shifts remain a key factor to watch.
GBP/USD has extended gains for a third session, hovering near a 39-month high just shy of $1.36 as dollar weakness intensifies amid US fiscal concerns and erratic trade policy. In fact, for the first time since the global financial crisis, options traders are no longer bearish on sterling’s long-term outlook versus the US dollar. Meanwhile, although EUR/USD’s strength has limited sterling’s gains against the euro, the pound has still climbed over 3% since last month’s selloff as it attempt to overturn the key 200-day moving average located at €1.1933.
It’s quiet on the domestic UK data docket this week, so external developments will be a key driver of sterling price action this week. Indeed, sterling’s high-beta nature means a sudden shift in risk sentiment poses the biggest threat to further gains, keeping investors on watch for potential volatility ahead.
GBP/USD up 1.3% in seven days
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 26-30
All times are in BST
Have a question? [email protected]
*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.
Leave a Reply