The dollar weakened on Tuesday (July 22), with the yen among the currencies gaining ground against the greenback, as investors monitored negotiations ahead of an August 1 deadline that could impose steep tariffs on products from U.S. trading partners that fail to reach an agreement.

Trading was largely subdued, with the Japanese currency strengthening for a second straight session following the widely expected outcome of the weekend's upper house elections in Japan. Focus has shifted to how quickly Tokyo can reach a trade deal with Washington and to Prime Minister Shigeru Ishiba's future as leader.

In afternoon trading, the dollar weakened 0.7% to 146.36 yen, after weakening more than 1% on Monday following the weekend election and a national holiday. The U.S. currency has weakened for two consecutive sessions against the yen.

With less than a week to go until August 1, U.S. Treasury Secretary Scott Bessent said Monday that the government is more concerned with the quality of a trade agreement than its timing.

When asked if the deadline could be extended for countries engaged in productive talks with Washington, Bessent said President Donald Trump would make that decision.

"The market...is watching that development (the August 1 tariff deadline) until something really definitive happens," said Brad Bechtel, global head of FX at Jefferies in New York.

"And a lot of the data actually looks fine even with all the tariffs, at least the ones that have been implemented."

Uncertainty over the status of global tariffs has ultimately weighed heavily on the foreign exchange market, keeping most currencies trading in tight ranges, even as stocks on Wall Street have hit new highs.

The dollar index, which measures its value against a basket of currencies, weakened 0.3% to 97.545, after falling about 0.6% on Monday.

The euro edged up 0.2% to $1.1725, with the European Central Bank also due to weigh in at its central bank meeting this week. However, the ECB is not expected to adjust eurozone interest rates.

A deal between the European Union, which is likely to face 30% tariffs starting August 1, and the United States remains elusive. EU diplomats said on Monday they were exploring a broader range of possible countermeasures as prospects for a deal fade.

"The Trump administration has shown little tolerance for retaliatory measures, and there is a risk this could escalate (albeit temporarily) into a retaliatory tariff escalation," wrote Francesco Pesole, a currency strategist at ING, in a research note.

"The euro's ability to maintain its preference over the dollar amid tariff tensions will depend on the extent of the escalation and whether the EU emerges as a relative loser while other countries manage to reach a significant agreement with the US," he added.

Concerns about the independence of the Federal Reserve are also on investors' minds, as Trump has repeatedly criticized Chairman Jerome Powell and urged him to resign due to the central bank's reluctance to cut interest rates.

"Our baseline prediction remains that solid US data and a rebound in tariff-driven inflation will keep the FOMC on hold until 2026, and that the resulting shift in interest rate differentials will drive a sustained rebound in the dollar in the coming months," said Jonas Goltermann, deputy chief market economist at Capital Economics. (alg)

Source: Reuters