The US dollar is extending its retreat following a sharp rally on Monday, which had been driven by favorable economic news and shifts in Federal Reserve rate expectations. However, those gains have now largely reversed, as the dollar weakens against nearly all major global currencies. The South Korean won and Japanese yen led the way, with gains of 1.8% and 1.2% respectively. The dollar’s earlier strength had coincided with downward revisions to US recession risks and expectations of the next Fed rate cut being delayed until Q4. Despite that, momentum has now shifted, pushing the greenback downward across global markets.

Asia Pacific Markets

In the Asia Pacific region, currencies and equities are showing strong performances. The Australian dollar surged over 1.6%, fully recovering Monday’s losses and testing its highest level of the year. Market attention is turning to upcoming employment data, which could further influence momentum.
In Japan, the yen rallied as the dollar fell from a recent high of JPY148.65 to around JPY145.60. Comments from the Bank of Japan suggesting possible tightening later this year helped buoy the currency. Meanwhile, trade discussions with the US remain uncertain, and Japanese 10-year bond yields have risen notably before easing slightly to near 1.46%.

European Markets

The euro rebounded strongly from earlier lows near $1.1065, climbing to above $1.1260. The rally is supported by solid industrial output figures from Germany and Spain, bolstering expectations for an upbeat eurozone economic outlook. Traders are also awaiting the European Commission's revised growth and inflation forecasts due at the end of the week.
Meanwhile, the British pound has also regained ground, climbing from $1.3140 to $1.3360. The next target lies near $1.3400, as investors anticipate the release of UK Q1 GDP figures, which the Bank of England estimates to show 0.6% growth.

American Markets

The US Dollar Index, after reaching a peak near 102.00 on Monday, has dropped significantly to around 100.30, with potential to fall further to 100.00. This decline continues despite markets pushing out the expected Fed rate cut to Q4. Optimism from a US-China trade de-escalation and a reduced likelihood of recession has not translated into sustained dollar strength. On the fiscal front, the House of Representatives is advancing a major budget bill, aiming to make the 2017 tax cuts permanent and eliminate taxes on overtime and tips. However, with high costs and limited offsetting cuts, the bill may face challenges in the Senate.