The US dollar index weakened on Wednesday (July 30th), snapping a four-day winning streak as investors remained cautious ahead of the Federal Reserve's policy meeting, following a sharp reaction to the US-EU trade deal earlier this week.

Meanwhile, the euro was poised to post its first monthly decline since December 2024. The Japanese yen strengthened against the dollar after a powerful earthquake struck the Kamchatka Peninsula in Russia's Far East and triggered a tsunami, prompting evacuation warnings across much of Japan's eastern coast.

Forex markets were largely stable as investors hesitated to place bets ahead of key economic reports and central bank meetings in Canada, Japan, and the United States. "Markets will be paying close attention to (Fed Chairman) Jerome Powell's remarks, regarding any signs of internal dissent within the committee and the chairman's stance amid ongoing tensions with the White House," said Julien Lafargue, chief market strategist at Barclays Private Bank and Wealth Management.

"A September rate cut remains a strong baseline scenario; much will depend on incoming data, starting with the US employment report due this Friday," he added. The US central bank is likely to keep rates unchanged on Wednesday.

Analysts note the sell-off in US assets—including US Treasury bonds and the dollar—began in early April, when the US appeared poised to launch a trade war against its key allies.

Trade agreements reached with Japan last week and the European Union over the weekend signaled a renewed US commitment to global engagement, easing investor concerns.

Investors' focus is now on negotiations between China and the US after officials agreed to extend their 90-day tariff truce, following two days of what both sides described as constructive talks in Stockholm.

The euro rose 0.15% to $1.1562 after weakening for the first two days of the week and hitting a one-month low of $1.15185 on Tuesday. The euro has strengthened 11.9% since the start of the year, but is expected to experience its first monthly decline in 2025.

Some analysts have expressed concerns about the economic impact of tariffs and their implications for the European Central Bank's interest rate outlook. However, markets adjusted their expectations for the ECB's easing path, pushing back the timeline for a potential rate cut to March 2026 last week, following the US-Japan trade deal and the central bank's hawkish stance after its policy meeting.

"Comparatively, the outcome (of the trade negotiations) is welcome, although not entirely reassuring (for the euro area)," said Modupe Adegbembo, an economist at Jefferies. "The EU has managed to avoid escalation and has not lost significant ground compared to other major exporters," she added, noting that a 5% base tariff is more favorable than the 30% tariff applied to Chinese goods and equivalent to Japan's 15% tariff.

The 15% US tariffs on European Union goods will dampen eurozone economic growth compared to six months ago, but the reduced risk of a costly trade war will partially offset the impact, ECB policymaker Gabriel Makhlouf said.

The dollar index fell 0.13% to 98.774. It hit a five-week high of 99.143 on Tuesday and is on track to post its first monthly gain this year. (alg)

Source: Reuters