U.S.-Japan and Other Trade Deals but Also Confusion and Worry about Dollar’s Trend – Currency Thoughts
U.S.-Japan and Other Trade Deals but Also Confusion and Worry about Dollar’s Trend
July 23, 2025
Some good developments on the tariff front emerged in the past 24 hours, namely a trade deal between the United States and Japan that puts the U.S. tariff on Japanese imports at 15% instead of the 25% levy threatened in early April and also commits Japanese businesses to invest $550 billion in America. Deals were also worked out between the United States and the Philippines and Indonesia, trimming their tariff sizes to 19%. In Indonesia’s case, that’s a tad less than half of what has been threatened initially.
In response, stock markets jumped today by 3.5% in Japan and 1.7% in both Indonesia and the Philippines. In selected other countries around the Pacific Rim, share prices closed up 1.6% in Hong Kong, 1.4% in Taiwan, 0.7% in Australia but just 0.3% in South Korea and unchanged in China. The deal with Japan breathed life into hopes that the EU might also strike a deal, but such was tempered by reports of contingency plans among EU governments in case no agreement with the U.S. emerges. While equities currently show overnight gains of 1.3% in Italy and 1.0% in France, the British FTSE and German DAX are up just 0.4%. In U.S. stock futures, small caps have outperformed the larger companies in pre-open trading.
The U.S.-Japanese deal had two other immediate consequences. Reports surfaced that Prime Minister Ishiba might resign after all now that a trade deal has been reached. He had initially said he wouldn’t step down and has not confirmed the new rumors. In addition, Deputy Bank of Japan Governor Uchida made remarks that a trade deal removes a bigger possible shock to Japan’s economy and therefore seems likely to bring the timing of the next central bank interest rate hike in a bit closer.
Among ten-year sovereign debt yields overnight, the Japanese JGB rate jumped seven basis points, and yields elsewhere went up four bps in the U.K. and a basis point each in the United States, Germany, France and Italy.
Prices for Bitcoin, WTI oil and gold have fallen 1.3%, 0.5%, and 0.1% so far today.
The dollar edged up 0.1% against the Swiss franc and 0.2% relative to the euro and peso but also depreciated overnight by 0.7% against the kiwi, 0.6% versus the Australian dollar, 0.3% vis-a-vis the Japanese yen and Korean won, 0.2% against the Canadian dollar and 0.1% vis-a-vis sterling. Also the dollar’s losses since the start of this year are attracting greater attention and creating confusion over what a weaker dollar might portend for U.S. growth and inflation.
The dollar has depreciated 11.5% against the weighted DXY index from an intra-day 2025 peak touched just one week before the Trump inaugural in January. President Trump has repeatedly endorsed a strong dollar, but his agenda seemingly points to lessening strength on many scores such as extending the powers of executive branch of the Federal government, weakening the rule of law in the process, discarding American soft power for a foreign policy that stresses isolation, weaponizing tariffs, waging war against elite U.S. universities that play a crucial role in attracting foreign expertise and incubating future technologies, damaging the Federal Reserve’s image of independence and therefore credibility in preserving future price stability, and massive migrant deportations federally administered programs without in either case much thought to distinguishing between vitally needed services from unnecessary waste.
More than any other single issue, the spike of U.S. inflation in 2021 and 2022 sealed President Trump’s return to the White House. Weak dollar periods in the past have been associated with elevated inflation, high interest rates, and eventual soft growth. Selling pressure on the dollar played an integral role in several inflationary waves in the late 1960s and 1970s and three recessions that played out between 1973 and 1982. Former Treasury Secretary Rubin’s conversion to a strong dollar promoter in the mid-1990s was instrumental in one of America’s fastest post-war growth period. U.S. share prices have performed well in times when the dollar exuded a strong and healthy image.
Trump wants to greatly reduce the U.S. trade deficit, promoting a new golden era of manufacturing, and lower and sustain long-term interest rates to levels that lighten the government’s debt service burden. Getting the first of these objectives and perhaps his top priority will be elusive if the dollar is strongly bid. That is a conundrum.
Several countries reported consumer confidence data this Wednesday. In the Netherlands, household sentiment rose to a 5-month high in July of -32. In the 2020’s, such has ranged from -59 in October 2022 to -21 in September 2024. Danish consumer confidence settled back to a 2-month low this month of -15.7 but not as weak as May’s 22-month low of -18.4. Slovenian consumer sentiment also weakened in July, dropping two index points to a 3-month low of -28, and Turkish consumer confidence fell 1.6 points below June’s two year high to a 3-month low. South Korean consumer sentiment improved 2.1 index points to a 90-month high in July.
Interest rate decisions were announced after scheduled policy reviews in Sri Lanka and Azerbaijan. The policy rate of the Central Bank of Sri Lanka, which crested briefly at 15.5% during the first half of 2023 and then dropped to 9.0% by the end of that year and 8.0% by November 2024, was cut just once earlier this year in May and kept at 7.75% after this month’s review. Sri Lankan consumer price inflation swung dramatically from a peak of 67.4% in Septembe 2022 to a low of minus 4.2% earlier this year in February. June’s reading of -0.6% was the least negative in nine months, and a return to positive territory is anticipated in the current quarter en route to eventual convergence with the target of 5.0%.
At the Central Bank of Azerbaijan, officials lowered their refinancing rate by 25 basis points today to 7.0%. This cut was the first one made since May 2024 and brings the cumulative decline from a 9.0% peak in 2023 to two full percentage points. In resuming the rate reduction cycle, a released statement declares that
Annual inflation is projected to remain within the target range in both 2025 and 2026. According to the July forecast, annual inflation is expected to be 5.7% in 2025 and 5.3% in 2026. The alignment of inflation forecasts with the target and continued FX market stability provides grounds for easing monetary policy.
South African consumer price inflation rose to a 4-month high of 3.0% in June, but underlying core inflation edged 0.1 percentage point lower to a 50-month low of 2.9%. Total inflation had peaked at 7.8% in September 2022.
In Singapore, CPI inflation last month matched May’s 51-month low of 0.8%, and core inflation held steady at 0.6%.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Central Bank of Azerbaijan, Central Bank of Sri Lanka, U.S.-Japanese trade deal
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