TRADING DAY Dollar despair deepens

Reuters

20 hours ago

ORLANDO, Florida, June 12 (Reuters) - TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
I'm excited to announce that I'm now part of Reuters Open Interest (ROI), an essential new source for data-driven, expert commentary on market and economic trends. You can find ROI on the Reuters website, and you can follow us on LinkedIn and X.
The dollar's slide accelerated on Thursday, as more evidence of cooling U.S. price pressures weighed on Treasury yields and dragged the greenback to lows against a basket of major currencies not seen in more than three years.
In my column today I look ahead to next week's Fed meeting. With inflation cooling but tariffs yet to kick in, is Fed policy still in a "good place" as Chair Jerome Powell repeatedly said last month? More on that below, but first, a roundup of the main market moves.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today's Key Market Moves
Dollar despair deepens
The dollar grabbed the global market spotlight on Thursday, and once again, for the wrong reasons. If it's failing to get any support when U.S. bond yields are rising, it's getting hit even harder when they're falling. As was the case on Thursday.
After a string of recent soft consumer inflation prints, it was the turn of producer price inflation to cement the view that U.S. price pressures aren't as hot as economists have thought. Tariffs have yet to be fully felt, of course, but right now inflation across the board is pretty tame.
Rates traders brought forward the timing of when they think the Fed will cut interest rates to September from October and, also supported by a strong 30-year bond auction, yields fell across the curve.
The dollar index is now down 10% year to date, and the euro is up 12%. We're only at the half-way point of the year, but it's worth noting that the last time the dollar fell more than 10% in a calendar year was 2003.
Much of its weakness this year is down to non-U.S. investors hedging their exposure to U.S. assets much more than they have previously. In effect, that equates to selling dollars, and European pension and insurance funds are at the heart of it.
"Our analysis suggests there is much more still to come," reckon analysts at BNP Paribas, recommending that investors buy the euro with a target of $1.20.
They calculate that if Dutch and Danish pension funds reduce dollar exposure to 2015 levels as a share of total assets under management, they have a further $217 billion to sell. And that's just Danish and Dutch funds.
On the tariffs front, investors are still digesting this week's U.S.-China deal, outlined by Washington on Wednesday and confirmed by Beijing on Thursday. Still, there is some ambiguity around key elements of the deal, including rare earth export licenses and details of the tariffs.
JPMorgan's U.S. economists calculate that, all told, the total effective U.S. tariff rate will be around 14%. When levied on $3.1 trillion of imported goods, that equates to a tax on U.S. businesses and consumers of over $400 billion. It remains to be seen how that is split, but history shows consumers bear most of the burden, they note.
"The stagflationary impulse from higher tariffs has lowered our GDP growth outlook for this year (4Q/4Q) from 2.0% at the start of the year to 1.3% currently," they wrote on Thursday.
On the other hand, economists at Oxford Economics on Thursday raised their 2025 U.S. GDP forecast to 1.5% from 1.3% and said the likelihood of recession has fallen.
You pay your money, you take your choice.
Is the Fed still in a "good place"?
At the Federal Open Market Committee meeting next week, investors will scrutinize all communications for any sign that the recent softening in U.S. inflation could be enough to nudge policymakers closer to cutting interest rates.
Current economic data might be leaning in that direction, but policy out of Washington could well keep Chair Jerome Powell and colleagues in 'wait and see' mode.
No one expects the Fed to cut rates next week, but businesses, households and investors should get a better sense of policymakers' future plans from the revised quarterly Staff Economic Projections and Powell's press conference.
Powell was very clear in his post-meeting press conference last month that the Fed is prepared to take its time assessing the incoming economic data, particularly the impact of tariffs, before deciding on its next step.
He told reporters no less than eight times that policy is in a "good place" and said four times that the Fed is "well positioned" to face the challenges ahead. Will he change his tune next Wednesday?
Annual PCE inflation in April was 2.1%, the lowest in four years and virtually at the Fed's 2% target, while CPI inflation in May was also lower than expected. The labor market is softening, economic activity is slowing, and recent red-hot consumer inflation expectations are now starting to come down.
In that light, it may be surprising that markets are not fully pricing in a quarter-point rate cut until October.
"The upcoming meeting offers an opportunity (for Fed officials) to signal that the recent mix of tamer inflation and softer consumption growth warrant a careful 'recalibration' of rates lower, while remaining very cautious about what comes next," economist Phil Suttle wrote on Wednesday.
But there are two well-known barriers that could keep the Fed from quickly re-joining the ranks of rate-cutting central banks: tariffs and the U.S. fiscal outlook.
Tariffs have yet to show up in consumer prices, especially in goods, and no one knows how inflationary they will be. They could simply result in a one-off price hit, they could trigger longer-lasting price spikes, or the inflationary impact could end up being limited if companies absorb a lot of the price increases. In other words, everything is on the table.
Equity investors appear to be pretty sanguine about it all, hauling the S&P 500 back near its all-time high. But Powell and colleagues may be slower to lower their guard, and for good reason.
Although import duties on goods from China will be lower than feared a few months ago and Washington is expected to seal more trade deals in the coming weeks, overall tariffs will still end up being significantly higher than they were at the end of last year, probably the highest since the 1930s.
Economists at Goldman Sachs reckon U.S. inflation will rise to near 4% later this year, with tariffs accounting for around half of that. This makes the U.S. an "important exception" among industrialized economies, the OECD said last week.
The other major concern is the U.S. public finances. President Trump's 'big beautiful bill' being debated in congress is expected to add $2.4 trillion to the federal debt over the next decade, and many economists expect the budget deficit will hover around 7% of GDP for years.
With fiscal policy so loose, Fed officials may be reluctant to signal a readiness to loosen monetary policy, especially if there is no pressing need to do so.
FOMC members in December last changed their median forecasts for the central bank's policy rate, hiking it this year and next year by a hefty 50 basis points to 3.9% and 3.4%, respectively. They left projections unchanged in March amid the tariff fog.
That implies 50 basis points of rate cuts this year and another 50 bps next year, which is pretty much in line with rates futures markets right now. So perhaps Fed policy is still in a "good place", but with economic expectations changing quickly, it's unclear how long that will be the case.
What could move markets tomorrow?
Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, opens new tab, is committed to integrity, independence, and freedom from bias.