After showing stability, global financial markets are reacting to political shifts in Germany, leading to a decline in the US dollar. The euro has recouped its post-election losses, supported by a narrowing US-Eurozone interest rate differential. Meanwhile, economic concerns in Japan have led to disappointing figures in real household spending and a downward revision in GDP growth for Q4. Most G10 currencies are strengthening against the dollar, although the Japanese yen and Swiss franc are struggling. The US stock market downturn has prompted several corporations to postpone investment-grade bond issuances. European equities are experiencing their longest losing streak of the year, while Asia-Pacific markets have mostly declined, except for Chinese stocks, which remain resilient.

Asia Pacific Markets

The Japanese yen has weakened further, with the dollar hitting a five-month low near JPY146.55. Economic reports from Japan were disappointing, with household spending growing only 0.8% year-over-year in January, well below the expected 3.7%. Additionally, Japan's Q4 GDP growth was revised down to 2.2% annualized. The US-Japan interest rate differential has narrowed significantly, reducing support for the yen.
Meanwhile, the Chinese yuan is trading near the lower end of last week’s range, with officials maintaining its relative stability against the dollar.

European Markets

The euro has rebounded as news emerged that Germany’s Green Party is willing to negotiate with the CDU and SPD on defense spending. This development has lifted the euro above $1.09, signaling a shift away from previous concerns about reaching parity with the dollar. In the derivatives market, speculative short positions in the euro have been declining for three consecutive weeks.
Meanwhile, the British pound recently reached above $1.29 before experiencing a slight pullback. Rising German bond yields relative to UK bonds have contributed to a strong rally in the euro against sterling. The euro is approaching its highest levels against the pound this year, marking a significant turnaround from its late February lows.

American Markets

The US dollar has experienced a notable decline, dropping around 6% from its peak a week before Trump’s second inauguration. This decline has surpassed key retracement levels of its prior rally. The Dollar Index, which had remained above 104.00 since early November, has now fallen to a low of 103.40, nearing its lowest post-election level. The deterioration in small business optimism and concerns over upcoming economic data, including inflation figures, have contributed to bearish sentiment. Meanwhile, discussions about potential tariffs on steel and aluminum and efforts to prevent a government shutdown are adding uncertainty. The US labor market data, including the JOLTS report, will be closely watched for further indications of economic direction.