The dollar’s downtrend is slowing as recent updates on US tariffs have a diminishing impact on currency markets. Instead, macroeconomic factors are gaining traction, particularly the expected increase in US prices during the third quarter, which could spark a counter-trend dollar bounce.
A strong trade-weighted dollar, driven by sticky prices and an independent Federal Reserve, has fallen 12% over the past six months – a significant move comparable to historical extremes. The recent reversal of higher US tariff rates has not harmed the dollar, with short positions becoming stale. However, as tariffs continue to impact inflation, they may finally show up in US data, supporting the Fed’s cautious stance on rate cuts.
A potential reversal of short-term interest rates could benefit the dollar. Investors are looking to Japan for stability this month, particularly following upper House elections and their implications for Japanese fiscal policy. If the yen strengthens, it could be a negative for asset markets and the currency. In contrast, Switzerland faces limited room to cut rates due to strong economic conditions and trade discussions with the US.
Looking ahead, EUR/USD is expected to correct back to 1.15 this quarter, while the dollar downtrend may resume towards year-end when the Fed cuts interest rates by 50bp. Overall, macroeconomic factors are taking center stage in FX markets, with diminishing marginal impact from tariff uncertainty.
Source: https://think.ing.com/articles/fx-markets-learn-to-live-with-tariff-uncertainty