While we remain negative on the USD in the longer term, it may be due for a modest correction or a consolidation. The factors that depreciated the DXY Index by more than 10% over the past six months have faded.
First, the waning US exceptionalism narrative that weighed on the USD has faded. US equities (S&P 500) have rebounded to fresh record highs. The Atlanta Fed GDPNow model expects advance GDP growth (out on July 30) to recover to an annualized 2.6% QoQ saar in 2Q25 following a 0.5% contraction in 1Q25.
Second, last Thursday’s stronger-than-expected US jobs report dashed the market’s hope for an earlier Fed cut on July 30. The unemployment rate declined to 4.1% in June after holding steady at 4.2% for three months, bucking the Fed’s projection, in the June Summary of Economic Projections (SEP), for it to rise to 4.5% in 4Q25. The FOMC meeting minutes due on July 10 should reiterate Fed Chair Jerome Powell’s view that tariffs will drive inflation higher in the coming months. Despite the New York Fed’s softer inflation expectation readings, FOMC members proceeded to lift their 4Q25 projection for core PCE inflation to 3.1% from 2.8%. in June’s SEP.
At the European Central Bank Forum in Sintra, major central banks collectively became less complacent about cooling inflation. They pivoted towards cautious monitoring, signalling no overt moves and only data-driven decisions on interest rates. As seen over 2023-2024, such a synchronization towards “wait-and-see” guidance weakened the directional conviction in currency markets.
Third, US President Donald Trump signed the One Big Beautiful Bill on Independence Day, along with a USD5 trillion increase in the debt ceiling, thereby removing the risk of a US government debt default. US Treasury Secretary Scott Bessent said he would not increase the sales of longer-dated debt in the next several quarters.
Fourth, global trade uncertainty could resurface because the Trump administration did not deliver the comprehensive trade deals by the July 9 expiration of the 90-day tariff pause. Meanwhile, the Court of International Trade’s legal case against Trump’s IEEPA-related tariffs remains unresolved, with a hearing scheduled for July 31. In response, Trump plans to issue “tariff letters” to 12 countries, presenting them with non-negotiable “take it or leave it” offers or face higher tariff rates on August 1. Bessent added that the focus is on 18 nations that accounted for 95% of the trade deficit.
Fifth, Bessent expressed some discomfort about the recent speculation against the USD’s global status. He dismissed the Chinese yuan’s prospects of replacing the USD as a reserve currency due to its non-convertibility on the capital account. He also noted that some EU policymakers have become wary of the EUR/USD’s strength near 1.20, which has partially offset some of the enthusiasm generated by ECB President Christine Lagarde’s push for a larger international role for the EUR.
However, if US bond yields rise due to debt and inflation concerns, and stocks start giving back gains amid tariff-related growth worries, the USD could resume its downtrend.
Quote of the Day
”Long run is a misleading guide to current affairs. In the long run we are all dead.”
John Maynard Keynes
July 7 in history
In 1930, John Maynard Keynes took his seat in the British House Of Lords as Baron Keynes of Tilton after being knighted.
Topic
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.