US FX WRAP: Dollar gains amid rise in US yields as latest US tariff round builds inflationary fears

Analysis details (20:43)

The Dollar's July recovery continued into the weekend, with trade tensions exacerbated between the US and Canada after Trump announced 35% tariffs on Canada. A letter to the EU is expected at any point now, with eyes on whether Trump will be aggressive or not when compared with the 20% reciprocal tariff announced on "Liberation Day". US data was thin, with the Federal Budget USD 316bln deficit in May flipping to a USD 27bln surplus in June, thanks to record-high gross customs duties revenue on account of tariffs. At the Fed, Goolsbee (2205 voter) sounded in no rush to return to easing, remarking the latest tariff threats could delay rate cuts, and make it messy to truly say how the economy is doing. Behind the slowly returning confidence in the dollar, perhaps, is that while some of Trump's latest tariff announcements have been more aggressive than in early April, elements of the TACO trade are still reminiscent. The 35% tariff on Canada is to keep the exemption for USMCA goods, and when asked about possible Canada tariff carve-outs, said "we will see" .

EUR/USD was modestly lower as markets awaited the Trump trade letter to the EU, which is likely to hit some point this evening. Newsflow out of Europe concerned the ECB, where Schnabel maintained her stance as a hawk, disapproving of a further rate cut. At Rabobank, they say short covering can lift the USD further in the coming weeks, and they maintain a 1-month target of 1.16. Over 12 months, they remain optimistic that EUR/USD can eventually extend its gains to 1.20. 

GBP was among the worst G10 performers on Friday, weighed by an unexpected 0.1% (exp. +0.1%) contraction in UK GDP in May. Despite the surprise miss, Pantheon Macroeconomics says the data isn't as bad as it looks, citing the size of the drop in manufacturing looks erratic and should partly rebound, upward revisions to GDP 3M/3M, and signs of a GDP growth rebound in June. 

CAD saw a choppy session, weighed at first by the Trump announcement of 35% before, regaining ground ahead of the jobs reports. The strong report saw immediate CAD strength, but most of the move was pared. The report saw the economy add 83.1k jobs (exp. 0.0k), helped by a rebound in part-time employment, with the unemployment rate unexpectedly falling to 6.9% (exp. 7.1%) from 7.0% despite the participation rate rising. USD/CAD sits above its 21 DMA (1.3659) with Canada's Industry Minister saying they are turning to trust partners in Europe and other allies amid US threats. 

Haven's performance was mixed. Gold was supported amid the risk-off trade fears, while the rise in US yields weighed more so on the Yen, putting USD/JPY at 147.50 while USD/CHF was little changed at 0.7970.

Brazil was void of tier 1 data, with the anticipated US trade letters on the US and EU the key events. Since the Trump 50% tariff announcement on Brazil, a further weakening in the BRL has been avoided, though equities in Brazil remained subdued. Brazil's President Lula showed no signs of kowtowing to Trump, planning to appeal the US tariffs to the WTO and is interested in creating a trade currency despite Trump's 10% tariff threat on countries that align with BRICS.

11 Jul 2025 - 20:43- ForexData- Source: Newsquawk