This week marks a significant downturn for the US dollar, which has declined against nearly all major global currencies. Only the Turkish lira and the Hong Kong dollar have bucked the trend. Within the G10, the Australian dollar was the sole currency not to post at least a 1% gain. The British pound surged to a three-year high, supported by unexpectedly strong retail sales. Meanwhile, the Dollar Index is poised to end a four-week rally, even as expectations for the next Federal Reserve rate cut shift toward the fourth quarter. Market sentiment has also been shaped by ongoing tariff discussions and budget concerns in the US.

Asia Pacific Markets

The Japanese yen and Australian dollar showed contrasting movements this week. The yen initially weakened but rebounded as the US dollar retreated toward levels seen earlier in the week. Despite rising inflation and surging long-term bond yields in Japan, the currency regained some strength. Japanese stocks, especially bank shares, have shown resilience.
In Australia, the local currency struggled early on but recovered to the upper boundary of a recent trading range. The Reserve Bank of Australia cut rates by 25 basis points and hinted it had considered a larger cut, boosting expectations of another move in July.

European Markets

In Europe, the euro briefly climbed to its highest point in a month before slipping, only to rebound once more. It appears the broader weakness of the dollar is driving the euro’s strength, although an upward revision to Germany’s GDP also provided support. The European Central Bank is expected to reduce interest rates in early June, with inflation and growth forecasts likely to be downgraded.
In the UK, sterling rallied past $1.35 for the first time in three years. This was driven by robust retail sales and a less aggressive rate-cut outlook for the Bank of England. Investors now expect the base rate to end the year near 3.82%.

American Markets

The US dollar attempted a recovery midweek, buoyed by stronger-than-expected PMI data, but its gains were short-lived as selling pressure returned. The Dollar Index has fallen near key support levels, suggesting the end of a four-week advance. New home sales data is expected to show a decline following a sharp rise in March, though such data typically doesn't impact markets significantly. Attention is shifting to upcoming economic releases including durable goods orders and the PCE deflator, which may reflect only a modest easing of inflation, influenced by recent CPI and PPI figures.