On Monday, the U.S. dollar rallied as the euro retreated, spurred by the announcement of a trade agreement between the United States and the European Union, just ahead of this week’s Federal Reserve meeting.
By 04:25 ET (08:25 GMT), the Dollar Index, which measures the greenback against six other major currencies, had risen 0.4% to 97.815. Despite the gain, it was still set for a roughly 1% decline over the week, marking its weakest stretch in a month.
Trade pact bolsters dollar; eyes on Fed meeting
U.S. President Donald Trump and European Commission President Ursula von der Leyen unveiled the deal over the weekend in Scotland. The agreement sets a 15% import tariff on European goods entering the U.S., halving the initially threatened 30% rate scheduled for early next month.
Trump highlighted that the European Union intends to invest around $600 billion in the U.S. economy and significantly increase its purchases of American energy and military equipment.
This deal closely follows a similar agreement reached last week with Japan, where Tokyo committed to investing approximately $550 billion in the U.S., paired with a 15% tariff on its vehicle and other imports.
As worries about the economic impact of steep tariffs fade, market focus is shifting toward upcoming economic indicators and central bank meetings, especially the Federal Reserve’s policy decision later this week.
“The U.S. macro data includes jobs data (JOLTS Tuesday, NFP Friday), a likely bounce back in second quarter GDP on Wednesday and stickier inflation on Thursday (June core PCE), which should tick back up to 0.3% month-on-month,” said analysts at ING, in a note.
“This should leave the majority of the Federal Reserve comfortable in their patient position on interest rates (FOMC meeting on Wednesday) and see a further pricing out of the prospects of a September Fed rate cut.”
Euro falls further
In European markets, the EUR/USD pair dropped 0.5% to 1.1688, pulling back from the near four-year peak reached earlier this month after the trade deal announcement.
“With a speculative market already reasonably long euros and a 2% per annum cost of carry against the dollar to deal with, we do not see the case for EUR/USD to immediately push through the highs at 1.1830,” ING analysts commented.
“Instead, we have a bias for EUR/USD drifting below 1.1700 and perhaps all the way to 1.1600 if the Fed continues to resist pressure to cut rates this Wednesday.”
Following last week’s decision by the European Central Bank to hold interest rates steady, market attention turns to the release of second-quarter GDP data on Wednesday and the eurozone’s July flash inflation figure on Friday, both key to assessing the likelihood of a rate cut in September.
Meanwhile, GBP/USD slipped 0.2% to 1.3409 amid concerns over Britain’s struggling economy and the government’s plans to raise taxes this autumn to shore up public finances.
“We favor a retest of decent support at 1.3370, below which losses can accelerate – perhaps all the way to 1.3150 if the US data/FOMC event risk this week is dollar positive enough,” ING said.
Yen weakens ahead of BOJ meeting
Elsewhere, USD/JPY climbed 0.4% to 148.25, as the Bank of Japan prepares to maintain its interest rates on Thursday amid global trade stability and domestic political uncertainty.
Analysts note that the U.S.-Japan trade agreement signed last week could give policymakers some leeway to consider a rate hike later this year.
Still, investor sentiment remains cautious due to ongoing political uncertainty following the ruling coalition’s loss in last week’s upper house elections and speculation around Prime Minister Shigeru Ishiba’s potential resignation.
The Australian dollar lost 0.7% to 0.6521, giving back some of last week’s strong gains, while the Chinese yuan edged up 0.1% to 7.1738 against the dollar.
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