The United States is escalating its trade policies with a new tariff announcement. President Trump has indicated plans to impose a 25% tariff on all steel and aluminum imports. Initially, the US dollar strengthened in early Asia Pacific trading but later lost momentum against most G10 currencies, except for the yen and the Canadian dollar. Canada remains the primary supplier of these metals to the US, making its currency particularly sensitive to these developments. Emerging market currencies, especially those outside of Central Europe, struggled against the dollar. While the full impact of these tariffs remains uncertain, the trade conflict appears to be in its early stages, with more details and potential responses from North America yet to emerge.
The Japanese yen was the top-performing currency last week, appreciating by approximately 2.5% against the US dollar. This marked the yen's fourth consecutive weekly rise, its longest rally since mid-2023. Despite a recent increase in US bond yields, the dollar struggled to gain ground against the yen, falling to JPY151.15 before rebounding to JPY152.55. The ongoing tariff discussions could affect Japan, which maintains an average tariff of 4.3% on US imports, compared to the US average of 1.6% on Japanese goods.
Meanwhile, the Chinese yuan weakened as the dollar climbed to a nine-day high of CNH7.3175. The 15% tariff imposed on US energy and vehicles came into effect, yet overall, US tariffs on Chinese imports remain higher than the reverse.
The euro faced downward pressure due to the growing concerns over potential US tariffs. Before the weekend, it dropped to a session low of $1.03 and extended its losses to $1.0280 in early Asia Pacific trading before recovering to nearly $1.0335. Additionally, the yield spread between US and German two-year bonds widened to 224 basis points, marking a new high for the year.
Meanwhile, the British pound remained stable ahead of crucial economic data. With the UK’s GDP figures set for release later in the week, investors closely monitored potential impacts. The Bank of England previously warned of an economic contraction following stagnation in the third quarter. Sterling found support near $1.2360 and climbed above $1.2400, though further movement appeared limited.
Following the announcement of a potential 25% tariff on steel and aluminum, the US dollar initially strengthened but later retreated, except against the Japanese yen. Market attention remains focused on the Federal Reserve, as recent employment data and inflation figures indicate the central bank will likely maintain current interest rates for the next several months. A rate cut is not fully priced in until September. The Dollar Index extended its recent gains, reaching a high of nearly 108.45. Meanwhile, the market awaits Fed Chair Jerome Powell’s congressional testimony, where he is expected to emphasize a patient approach due to economic uncertainties. The NY Fed’s survey on inflation expectations is also drawing attention, especially after the University of Michigan’s report showed a significant rise in one-year inflation projections. With multiple Fed officials scheduled to speak this week, traders remain on alert for any policy shifts.