US tariffs have returned, though legal proceedings remain unresolved. Treasury Secretary Bessent has confirmed a stall in US-China negotiations. The dollar, having weakened previously, has now rebounded, strengthening against most G10 currencies except the yen, which was bolstered by a strong Tokyo CPI. Japanese long-term bond yields fell for the first time in weeks, with the 30-year yield down by eight basis points and the 40-year by 43 basis points. While the dollar rose against G10 peers this week, it only posted monthly gains versus the yen and Canadian dollar. This turbulent week also saw Asian and US equities under pressure, while Europe posted a modest rebound.

Asia Pacific Markets

The Japanese yen experienced notable volatility, with the dollar reaching JPY146.30 before falling to JPY143.45. Strong Tokyo CPI figures and a stable labor market supported the yen, despite mixed retail and industrial data. Retail sales grew by 0.5% in April, while industrial output declined less than expected.
Meanwhile, the Australian dollar climbed after finding support near $0.6400, though it stayed within its established range. Weak April data, including a 5.7% drop in building approvals and a 0.1% fall in retail sales, increased the probability of a July rate cut to 67%. However, public sector credit offered a bright spot, rising 0.7%.

European Markets

The euro saw a sharp reversal, recovering from a dip to $1.1210 and nearing $1.1400 before encountering resistance. Inflation in the eurozone continues to ease, with declines in France, Spain, and Italy. However, German CPI figures remain sticky, and attention is shifting to the ECB meeting on June 5, where a quarter-point rate cut is expected. Yet, markets also anticipate a pause afterward.
The British pound initially dropped but rebounded above $1.3500 before pulling back to $1.3455. Sterling has risen 1% this month, supported by higher rate expectations. Still, its value shows a stronger correlation with the US dollar index than with local interest rate changes.

American Markets

The US dollar index faced pressure earlier in the week but has since recovered to around 99.60. Although a potential reversal pattern formed, the index may push higher toward the 100.00 level. The Federal Reserve’s preferred inflation metric, the PCE deflator, is expected to increase modestly, with core inflation slowing to its lowest in over four years. Consumer spending may cool to 0.2% in April. The trade deficit remains high, though slightly narrowed, and wholesale inventories likely rose again. Market attention is turning to next week’s employment data, with expectations for a 130,000 increase in nonfarm payrolls, below last year's pace.