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Date: 21st May 2025.


Dollar Weakens Ahead of G-7 as Traders Watch for US Policy Shifts.



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The US dollar slipped to its lowest level in two weeks on Wednesday, as market participants turned their attention to the upcoming Group-of-Seven summit for clues on whether the Trump administration is favouring a weaker greenback. The Bloomberg Dollar Spot Index fell for a third straight session, losing 0.4% on the day.


Speculation has grown after Japan’s Finance Minister, Katsunobu Kato, expressed his intent to hold currency discussions with US Treasury Secretary Scott Bessent during the G-7 meeting. South Korean officials have already confirmed that exchange rates were addressed during recent bilateral talks with the US, fueling expectations of a coordinated policy shift.


Fiscal concerns are adding to the dollar’s woes. Lawmakers in Washington are working on a proposed tax cut plan that aims to keep the revenue impact within $4.5 trillion over a decade, currently estimated at $3.8 trillion. This comes on the heels of a credit downgrade by Moody’s, which cited persistent and unaddressed budget deficits as a key reason for lowering the US government's credit rating.


‘The dollar is declining in tandem with rising long-term US yields, as investors grow uneasy about financing America's twin deficits,’ said Moh Siong Sim, FX strategist at Bank of Singapore. ‘We’re likely witnessing the early stages of a broader reallocation away from overweight US positions by global investors.’





Geopolitical Tensions Lift Oil, Equities Mixed in Asia


Oil prices spiked following a CNN report that suggested Israel may be preparing for a military strike on Iran’s nuclear facilities. US benchmark West Texas Intermediate crude rose $1.21 to $63.24 per barrel, while Brent crude added $1.20 to reach $66.58. The report, citing unnamed intelligence sources, said no final decision had been made by Israeli leaders, but any strike could derail ongoing nuclear negotiations and heighten instability in the Middle East—a region responsible for roughly a third of global oil supply.


Asian equity markets were mixed. The Hang Seng gained 0.4%, Shanghai’s Composite edged up 0.2%, and Australia’s ASX 200 advanced 0.8%. South Korea’s Kospi rose by the same margin, and Taiwan’s Taiex climbed 0.6%. Tokyo’s Nikkei 225, however, dipped 0.1% amid ongoing trade tensions with the US


Japan reported weaker trade data, with April exports to the US falling nearly 2% year-on-year. Total global export growth slowed to 2% from 4% in March, while imports from the US plunged over 11%. The country recorded a trade deficit of 115.8 billion yen ($804 million), and the yen's recent strength has further dampened export competitiveness. Vehicle exports, a core component of Japan’s trade, dropped nearly 6%.


The Japanese government continues to urge Washington to remove the tariffs introduced under President Trump, particularly the 25% levy on autos and duties on steel and aluminium. Economic Revitalisation Minister Ryosei Akazawa is expected to meet with US officials this weekend in a third round of negotiations.


Adding to domestic political pressures, Agriculture Minister Taku Eto resigned following controversial remarks about receiving free rice, triggering public backlash amid rising staple food prices.


Wall Street Dips as Travel Stocks Lag; Quantum Firm Soars


US stocks ended lower on Tuesday. The S&P 500 fell 0.4% to 5,940.46, its first decline in seven sessions. The Dow dropped 0.3%, and the Nasdaq lost 0.4%. Travel-related shares dragged the market lower, with Norwegian Cruise Line falling 3.9%, United Airlines off 2.9%, and Airbnb down 3.3%. Viking Holdings, despite better-than-expected earnings, slumped 5%.


Home Depot shares slid 0.6% after quarterly earnings missed estimates, though revenue came in ahead. The company maintained its full-year guidance, contrasting with other corporations that have cited tariff uncertainty and economic headwinds as reasons to withhold forecasts.


In contrast, D-Wave Quantum surged nearly 26% after launching a next-generation quantum computing platform, claiming it can tackle problems traditional computers cannot handle.


Investors are watching for earnings from Lowe’s and Target today.


Bonds and Currency Moves


This morning UK inflation jumped to 3.5% y/y in the headline rate, from 2.6% y/y in the previous month, with prices rising a whopping 1.2% m/m. The later timing of Easter and the start of the new fiscal year clearly impacted the higher-than-expected number. Core inflation accelerated to 3.8% y/y from 3.4% y/y, with services price inflation hitting 5.4% y/y, up 0.7% points over the month. The wider CPIH rate accelerated to 4.1% y/y from 3.4% y/y. The higher-than-expected number backs warnings from Chief Economist Pill that inflation risks have not disappeared and is prompting traders to trim rate cut bets.





Also, Canada’s April inflation data delivered a mixed picture. Headline CPI slowed to 1.7% year-over-year, the weakest since September, due to lower energy prices and the carbon tax repeal. However, core inflation surprised to the upside: the median rate climbed to 3.2% (from 2.9%), the trim rose to 3.1%, and the average core measure accelerated to 3.15%. The three-month moving average of core inflation jumped to 3.4% from 2.9%.


These stronger core figures complicate the Bank of Canada’s upcoming rate decision on June 4. The central bank held rates steady at its April 16 meeting but may now face pressure to act amid persistent underlying inflation.


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Please note that times displayed based on local time zone and are from time of writing this report.


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Andria Pichidi
HFMarkets


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