Rising geopolitical tensions and renewed tariff threats from President Trump have triggered cautious investor sentiment, but this hasn’t led to the usual dollar rally or gold surge. The U.S. dollar has weakened against most G10 and emerging market currencies, with the notable exception of the Mexican peso, which hit its highest level since last August. The British pound is lagging due to weak economic data, while other G10 currencies posted gains over 0.5%. South Korea’s continued stock market rally has boosted the won by over 1%, leading emerging market currencies higher. Gold prices fluctuated, reaching a weekly high near $3378 before pulling back to around $3360 in early European trading.

Asia Pacific Markets

In Asia, the Japanese yen saw sharp movements, with the dollar peaking around JPY145.45 before quickly dropping to JPY144.35 after softer U.S. inflation data. It later declined further to JPY143.65, nearing a key support zone. Japanese investment flows reflected some caution, with significant selling of foreign equities and bonds, although foreign interest in Japanese assets showed a modest rebound.
Meanwhile, the Australian dollar struggled alongside other commodity-linked currencies, briefly dropping to $0.6475 before recovering to $0.6500. The Australian dollar continues to underperform, reflecting broader market concerns and a risk-averse environment in the region.

European Markets

The euro climbed to $1.1565, its highest since April, buoyed by the weaker U.S. inflation report. Despite this strength, economic data from the eurozone paint a worrying picture: German, French, and Spanish industrial output dropped significantly in April. The UK's economy also stumbled, with April GDP contracting by 0.3%. Industrial and services sectors both declined, while the trade deficit widened. Only construction showed growth. These signs of weakness may force the Bank of England to reconsider its pace on rate cuts, as reflected in falling bond yields and growing market expectations.

American Markets

In the U.S., inflation data came in softer than expected, putting pressure on the dollar. Despite this, market expectations still don’t fully price in two rate cuts for the year. President Trump’s announcement that he will send tariff letters soon, along with speculation about a Fed leadership change, added to market uncertainty. Meanwhile, tensions in the Middle East have escalated, with embassy staff evacuations underway. Producer price data for May is expected to show a modest rise, influencing forecasts for the Fed’s preferred inflation gauge, the PCE deflator. The labor market continues to cool gradually, with jobless claims likely to edge higher. The Dollar Index is slipping toward multi-year lows, facing key support near 97.45.