The United States dollar index steadied in early deals on Monday following two weeks of declines, finding support from resilient labour market data and repriced expectations around the Federal Reserve’s rate path.
However, a volatile mix of geopolitical relief, fiscal concerns, and tariff-related threats kept traders on edge ahead of the deadline for President Donald Trump’s trade ultimatum.
The dollar index (DXY) touched lows not seen since February 2022 early last week before rebounding modestly. This recovery came on the back of a stronger-than-expected nonfarm payrolls (NFP) report, which showed 147,000 new jobs added in June.
Unemployment ticked lower to 4.1%, and jobless claims held firm, leading investors to push back expectations of near-term Fed rate cuts.
Nonetheless, the Greenback is still down 10.6% year-to-date, battered by soft inflation prints and political concerns.
Treasury Secretary Scott Bessent indicated to CNN's State of the Union over the weekend that tariffs first announced in April will take effect on August 1 unless countries reach new agreements.
“President Trump’s going to be sending letters to some of our trading partners, saying that if you don’t move things along, then on [1 August], you will boomerang back to your [2 April] tariff level,” he said.
Markets are also digesting Trump's passage of the ‘Big Beautiful Bill’, a sweeping tax cut and spending package set to add around US$3.4 trillion to the deficit.
Euro Buoyant, But Risks Mount
The euro hit a four-year high of 1.1830 before retreating modestly last week. Much of the move was fuelled by DXY weakness and a dovish Fed, although upbeat eurozone inflation data helped.
European Central Bank (ECB) President Christine Lagarde reiterated a hawkish tone, stating the ECB “will do whatever it must do” to return inflation to target.
June’s harmonised indices of consumer prices (HICP) held steady at 2%, with core inflation at 2.3%.
The ECB also remains concerned about trade volatility and its impact on the euro reserve status.
Aussie Retreats on Risk-Off and RBA Cut Expectations
The Australian dollar faded from eight-month highs as risk-off sentiment prevailed. Traders grew cautious ahead of Trump’s tariff deadline, with weaker-than-expected May trade data adding to pressure. Exports fell by 2.7%, narrowing the trade surplus.
Market bets are firming for another Reserve Bank of Australia (RBA) rate cut on Tuesday. ASX's RBA Rate Tracker indicated a 97% chance of a 25 basis point cut to 3.60%.
Meanwhile, the Fed’s steady hand has provided a relative yield cushion for the U.S. dollar.
Despite the retreat, AUD/USD retains a bullish medium-term tone, holding above key wedge support.
Sterling Recoils from Highs on Fiscal Jitters
Pound Sterling briefly surged to a near four-year high of 1.378 against the U.S. dollar before profit-taking and renewed fiscal concerns triggered a pullback to 1.356.
The UK’s stable gross domestic product (GDP) data lifted the pound last week, but jitters over Trump’s spending bill and trade spats capped gains.
Additionally, political noise resurfaced as UK Chancellor Rachel Reeves faced uncertainty about her position.
Yen Firms as BoJ Rate Hike Bets Grow
The Japanese yen ticked up as upbeat Japanese household spending data boosted expectations of BoJ policy tightening.
Spending rose 4.7% in May year-on-year, beating all forecasts.
In contrast, the DXY was pressured by lingering fiscal concerns, despite strong jobs data.
The BoJ remains cautiously hawkish, supported by persistent inflation above 2% and positive Tankan survey expectations.
Still, thin holiday trading limited volatility last week, with the pair holding above monthly lows near 143.50.
Economic Calendar Week Ahead
On Monday, Australia will release ANZ-Indeed Job Ads data, the Eurozone will publish its latest retail sales figures, and the UK will report on the Halifax House Price Index.
On Tuesday, Japan is set to release its current account data. In Australia, all attention will turn to NAB business confidence and the Reserve Bank of Australia’s interest rate decision and press conference. The U.S. will also release the NFIB Small Business Optimism Index.
On Wednesday, the U.S. will publish consumer inflation expectations and consumer credit changes. China will release its inflation rate and producer price index (PPI), while New Zealand's Reserve Bank (RBNZ) will announce its interest rate decision.
On Thursday, the U.S. will report wholesale inventories and FOMC meeting minutes. The UK will publish the RICS House Price Balance. Meanwhile, Japan will release foreign bond investment and PPI data, and South Korea’s central bank will announce its latest interest rate decision.
The U.S. will also publish its weekly initial jobless claims.
On Friday, New Zealand will release the Business NZ Purchasing Managers Index (PMI). In Australia, the Australian Bureau of Statistcis (ABS) will publish its Monthly Business Turnover Indicator. Singapore will report on GDP growth, while the UK will release data on GDP, the balance of trade, industrial production, and manufacturing output.
China will report vehicle sales figures, and Canada will publish its employment change and unemployment rate.
Finally, on Saturday, the U.S. will release its Monthly Budget Statement, while China will publish its latest balance of trade, import, and export data.
