Dollar Holds Firm as Geopolitical Tensions and Fed Decision Shape Market Sentiment

Economic

Forex

Summary:

The US dollar remained steady against major currencies amid investor demand for safety due to escalating Israel-Iran conflict and uncertainty surrounding the Federal Reserve’s upcoming rate decision...

Dollar Resilience Driven by Safe-Haven Demand

The US dollar maintained recent gains early Wednesday, supported by its traditional role as a safe-haven currency in times of global instability. Investors, facing heightened geopolitical risk following Israel’s continued strikes on Iran and the looming possibility of direct US involvement, have shifted capital toward dollar-denominated assets. As a result, the greenback has appreciated approximately 1% against the yen, franc, and euro since last Thursday, reversing part of its earlier 8% year-to-date decline.

The currency’s stability highlights the enduring appeal of dollar liquidity, even amid growing structural criticisms about US fiscal sustainability and erratic policymaking. Currency strategist Rodrigo Catril from the National Australia Bank noted that although long-term confidence in the dollar may be diluted, it remains the preferred instrument in scenarios involving elevated geopolitical risk.

Yen and Euro Under Pressure from Energy and Risk Exposure

As oil prices hover around $75 a barrel, the macroeconomic environment continues to weigh on net crude importers like Japan and the eurozone. Higher energy costs, stemming from Middle East uncertainty, exert additional pressure on their currencies by worsening trade balances and increasing inflationary risk. The Japanese yen weakened to a one-week low at 145.21 per dollar, while the euro inched up marginally to $1.149 after broader losses earlier in the week.

Despite the marginal uptick in euro sentiment, the outlook remains fragile. The European Union’s trade friction with the US, coupled with its reliance on imported energy, makes the bloc particularly vulnerable to external shocks—highlighting the currency’s sensitivity to both oil volatility and geopolitical developments.

Markets Await Fed Decision Amid Slowing Growth and Rising Oil

Investors are now focused on the US Federal Reserve’s upcoming policy decision. While the Fed is expected to keep interest rates unchanged, the forward guidance will be crucial. Markets will closely scrutinize how the central bank interprets slower US growth, erratic fiscal signals from the Trump administration, and the inflationary implications of rising energy prices.

Catril anticipates a cautious tone from the Fed, likely pointing to stickier inflation combined with a downward revision in the growth forecast. The challenge for the Fed lies in managing inflation expectations without prematurely tightening monetary policy in a weakening demand environment.

This balancing act is further complicated by geopolitical risks. Oil-driven cost pressures and trade tensions may force the Fed to adopt a more defensive policy posture, potentially delaying the timeline for rate cuts previously expected in late 2025.

Central Bank Divergence and Global Trade Pressures

Elsewhere, the Bank of Japan left interest rates unchanged and signaled a slower pace for bond tapering to ease domestic bond market volatility. The policy stance reflects Tokyo’s efforts to prevent further economic contraction amid soft export data, with Japan recording its first export decline in eight months in May.

Looking ahead, additional central bank decisions from the UK, Switzerland, Norway, and Sweden will offer further insight into how monetary authorities are responding to elevated global uncertainty. Divergences in rate paths could influence currency flows, particularly if European central banks adopt a more hawkish stance to counter energy-driven inflation.

Meanwhile, diplomatic stagnation continues to frustrate investors. The recent G7 summit in Canada failed to produce meaningful trade resolutions, and President Trump’s criticism of Japan and the EU as “tough” negotiators suggests further tariff escalations are likely. These trade dynamics feed into broader risk aversion and strengthen demand for dollar assets as a shield against volatility.

As geopolitical conflict and trade policy uncertainty reshape market dynamics, the US dollar has regained its role as a safe-haven asset. Its recent strength reflects a combination of risk aversion, relatively stronger macro fundamentals, and investor reluctance to hold exposure in more vulnerable currencies. However, with the Federal Reserve’s rate guidance and Trump’s tariff deadlines approaching, the dollar’s trajectory will ultimately hinge on whether policymakers can navigate an increasingly complex global economic landscape without further destabilizing investor confidence.

Source: Reuters

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Retail Rebound Driven by Stimulus Pushes Policy Limits

China’s ambitious consumer subsidy initiative—launched to offset weakening domestic demand and looming US tariffs—has temporarily revived household spending, but the rapid uptake is testing the system’s financial and administrative capacity. According to official data and local announcements, retail sales saw their strongest growth in over a year in May, driven primarily by the national “trade-in” program targeting home appliances and electronics. Sales in these sectors surged by over 50% last month.

Yet the pace of consumer participation has overwhelmed even the wealthiest provinces. Regions such as Henan and Chongqing have halted new subsidy applications, while others like Jiangsu and Guangdong have begun rationing daily quotas. These disruptions suggest that while the stimulus is effective in sparking short-term consumption, the underlying structure remains financially fragile and unevenly distributed.

Structural Strain Emerges as Funds Run Dry

Beijing has allocated 300 billion yuan ($41.8 billion) in ultra-long special sovereign bonds to support this stimulus initiative, with 162 billion yuan assigned to provinces in two tranches. However, the second tranche, announced in April, remains largely undisbursed as of mid-June. The delay in local disbursement highlights both logistical and fiscal limitations, raising concern among economists and officials that continued reliance on temporary cash incentives may be unsustainable.

Standard Chartered’s Ding Shuang noted that the fast uptake proves the program's immediate effectiveness in moving targeted goods. However, he emphasized the necessity for more durable, income-based support mechanisms to maintain momentum once the initial wave of subsidies ends. The effectiveness here appears more correlational than causational in terms of long-term behavior change—consumption surged because of the policy, but there is no evidence yet that it will sustain without fiscal injections.

Manipulation and Arbitrage Complicate Rollout

Further complicating matters is growing evidence of abuse. Several provinces, including Guangdong and Zhejiang, have suspended car subsidies due to fraudulent practices involving “zero-mileage” vehicles—new cars registered solely to qualify for rebates before being flipped on the used market. This points to a misalignment between policy goals and market incentives, where some businesses manipulate the system for arbitrage rather than fostering real consumption.

These episodes have triggered regulatory reviews and tightened oversight, but they also signal the challenges of managing large-scale fiscal programs in real time, especially when local governments face competing pressures: maintain spending momentum, preserve fiscal integrity, and avoid market distortions.

Retail Revival Amid Broader Economic Uncertainty

Despite these issues, the program has injected short-term vitality into China’s sluggish consumption landscape. Goldman Sachs economists noted the scheme’s role in boosting demand for durable goods, though they warned that regional funding shortfalls could limit June's figures. Morgan Stanley’s analysts echoed this view, highlighting how local suspensions may reflect not only administrative concerns but also attempts to smooth out consumption and mitigate opportunistic behavior during major sales events like the “618” shopping festival.

The resurgence in retail activity is particularly important as China faces mounting headwinds abroad. The reimposition of tariffs by the US under the Trump administration threatens China’s export engine, and a slowdown in global demand is already weighing on industrial output. These external pressures reinforce Beijing’s shift toward domestic consumption as a stabilizing force, but the current approach reveals deep structural imbalances.

Fiscal Pressures Narrow Policy Options

China’s fiscal capacity is becoming increasingly constrained. With revenue from land sales declining and tax receipts under pressure, the central government has ramped up borrowing—raising its fiscal deficit to the highest level in more than three decades and expanding special sovereign bond issuance by 80% from 2024. As a result, interest obligations are rising, further eroding spending flexibility.

This financial backdrop raises questions about the longevity of consumption subsidies as a primary policy tool. While some economists expect continued allocations to maintain public confidence, long-term fiscal health may depend on a pivot toward reforms that address income inequality, wage growth, and private-sector investment rather than temporary incentives.

China’s consumer stimulus campaign has temporarily reignited retail demand, but the rapid depletion of subsidy funds, fraud risks, and growing fiscal strain reveal the limitations of short-term policy tools in addressing deeper economic imbalances. As Beijing grapples with trade headwinds and domestic fragility, the current stimulus wave may serve more as a stopgap than a sustainable solution. For long-term stability, policymakers must look beyond consumption incentives toward structural reforms that restore confidence, drive income growth, and realign incentives for both consumers and businesses.

Source: Reuters

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Strategic Overhaul Aims to Unify and Strengthen APAC Investment Banking

Goldman Sachs is positioning itself for a stronger presence in Asia’s investment banking landscape through a major regional restructuring. Since late 2024, the firm has combined its merger and acquisition teams, consolidated financial and strategic investor services, and created a new capital solutions group. These moves culminated in the merger of three previously independent investment banking businesses—Japan, Australia and New Zealand, and the rest of Asia—under a unified Asia-Pacific (APAC) platform. In May 2025, Iain Drayton, a 19-year veteran of the firm, was appointed to lead the integrated franchise.

This unified platform marks a shift from the bank’s historically fragmented regional structure and is intended to streamline execution, deepen client coverage, and provide cross-market insights. According to Drayton, the strategy is designed not merely for internal efficiency but also to broaden the firm’s commercial footprint and enhance its appeal to clients seeking comprehensive regional support.

M&A and Equity Market Recovery Presents Strategic Entry Point

The timing of the revamp aligns with a noticeable resurgence in Asia’s capital markets. Drayton noted a “clear pickup” in large-scale M&A and a meaningful rebound in equity capital market (ECM) transactions since the integration began. This turnaround follows a two-to-three-year period dominated by global macroeconomic headwinds, especially from trade tensions and US tariff uncertainties that had dampened deal activity and delayed transactions.

However, current indicators point to a shift in market dynamics. With valuations in many sectors now more compelling and regional economies stabilizing, investor engagement is on the rise. Goldman Sachs is aiming to harness these favorable conditions—what Drayton describes as "strong tailwinds"—to build market share, particularly in sectors and markets that are showing renewed appetite for consolidation and capital raising.

Performance Metrics Signal Competitive Gains

Data from Dealogic underscores Goldman Sachs’ recent progress in the region. As of mid-June 2025, the firm has led $12 billion worth of equity capital market deals in Asia-Pacific, placing it ahead of major rivals like JP Morgan and Morgan Stanley. This top performance in ECM highlights the successful execution of deals under the new integrated model, likely facilitated by tighter coordination and improved regional resource allocation.

In mergers and acquisitions, Goldman Sachs placed third in the league tables with $111 billion in announced transactions, trailing only Nomura Holdings and Morgan Stanley. While this suggests room for improvement in advisory market share, it also reflects the firm’s presence in significant high-value transactions during the early phase of its post-revamp period.

Reshaped Structure to Offset Geopolitical and Policy Risk

The reorganization is not only a growth initiative but also a structural hedge against rising geopolitical complexity. With tariff policies from the United States continuing to cause global uncertainty—especially in trade-sensitive industries—Goldman’s move to operate as a cohesive APAC entity may improve its responsiveness to regional shifts and help navigate policy-driven disruptions.

By centralizing strategic planning and execution, the firm is better equipped to manage cross-border risks, align capital flow strategies across jurisdictions, and deliver unified advisory services to multinational clients seeking exposure to Asian markets.

Goldman Sachs’ APAC investment banking restructuring is a deliberate pivot toward a more integrated and regionally agile model. With capital markets showing renewed momentum and investor sentiment turning positive, the firm’s timing may prove advantageous. While it still faces competition from entrenched regional players, early signs—reflected in league table standings and revived deal activity—suggest that the structural overhaul is already producing tangible commercial benefits. The next phase will test how well this new model can scale and respond to both market opportunities and policy challenges in an increasingly competitive Asia-Pacific investment banking environment.

Source: Reuters

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Commodity

Rising Tensions Sustain Oil Price Surge

Oil markets remained firm on Wednesday, maintaining gains from a rally that has pushed prices up nearly 10% since Israel launched surprise strikes on Iran's nuclear sites last week. Brent crude traded close to $77 per barrel, while West Texas Intermediate held above $75—levels not seen since early 2025. The geopolitical pressure is intensifying as President Donald Trump issues increasingly aggressive statements toward Iran, including a demand for “unconditional surrender” and threats against its Supreme Leader, further stoking fears of wider military engagement.

The surge in oil prices is being driven less by actual supply disruption and more by expectations of what could happen next. Though Iran’s oil infrastructure remains intact and there is no current blockade of the Strait of Hormuz, the mere possibility of escalation has triggered a significant risk premium in global oil pricing.

Strait of Hormuz: The Market’s Pressure Point

The Strait of Hormuz—through which about 20% of the world’s crude oil flows—is again in focus. Although there are no indications that Iran is preparing to shut down this vital route, the perceived threat remains enough to send ripples through commodity markets. The Strait’s strategic importance stems from its role as the main artery for oil exports from Saudi Arabia, the UAE, and other Gulf producers. A disruption here could have immediate and dramatic consequences for global energy supply and pricing.

Charu Chanana of Saxo Markets highlighted that Trump’s rhetoric signals a breakdown in diplomatic options. She warned that in the event of a blockade or any actual disruption in Hormuz, oil prices could experience a rapid and substantial spike. This reflects not a proven causal chain, but a market behavior driven by heightened sensitivity to geopolitical developments in this corridor.

Market Volatility and Investor Behavior Intensify

Oil price volatility has now reached its highest level in three years, surpassing even the period following Russia’s 2022 invasion of Ukraine. This heightened state of uncertainty is prompting increased demand for hedging instruments. Brent’s prompt spread has widened significantly, indicating near-term supply concerns, while options markets show stronger bullish sentiment than seen during previous geopolitical shocks.

The movement in related markets underscores investor nervousness. Gold, traditionally viewed as a safe-haven asset, also rose modestly, and global equities exhibited downward pressure, reflecting broader economic anxieties.

Crude Inventories Shrink Sharply in the US

Adding to the bullish oil outlook is the steep decline in US crude inventories. Industry figures suggest a drawdown of over 10 million barrels last week—the largest since summer 2024. If verified by the Energy Information Administration, the drop would point to tightening domestic supply, either from stronger-than-expected demand or increased exports amid global uncertainty.

This supply-side contraction comes at a time when the market is already grappling with fears of a larger conflict. The dual pressure of falling inventories and geopolitical instability has created a scenario where any new disruption could trigger a disproportionately large price reaction.

Geopolitical Stakes: Strategic Signals from Israel, Iran, and the US

The conflict’s escalation has not only altered commodity markets but also redefined strategic dynamics. Israeli Prime Minister Benjamin Netanyahu has publicly stated that it is in America’s interest to support Israel in neutralizing Iran’s nuclear program. Meanwhile, Iran is reportedly readying its missile capabilities in preparation for potential strikes on US military bases in the region, should Washington move from support to direct intervention.

Though the US has not yet taken military action, its role as Israel’s primary arms supplier and defense partner, along with public military positioning, suggests the potential for deeper involvement remains very much alive.

Oil’s sharp rally and continued strength underscore the extent to which geopolitical risk is shaping market expectations. While no actual disruption has yet materialized in the Strait of Hormuz or Iran’s energy infrastructure, the perceived probability of conflict-induced supply shocks has fundamentally altered short-term market behavior. Combined with a record draw in US inventories, these developments point toward a fragile equilibrium where any misstep in diplomacy or military posturing could ignite further price escalation. In the near term, traders and policymakers alike will be watching both the battlefield and the Strait for signals of what comes next.

Source: Bloomberg

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Middle East Situation

US Edges Closer to Military Engagement Amid Escalating Middle East Tensions

The United States is approaching a critical decision point in its response to the intensifying Israel-Iran conflict. On Tuesday, President Donald Trump held a high-level national security meeting to assess potential US involvement, following five consecutive days of aerial exchanges between Iran and Israel. While the US has thus far provided defensive support to Israel without initiating direct strikes, mounting regional volatility and Trump’s increasingly aggressive rhetoric have fueled speculation that American military intervention is imminent.

Trump’s demand for Iran’s “unconditional surrender,” posted on social media, was coupled with veiled threats toward Iran’s Supreme Leader Ayatollah Ali Khamenei, raising the diplomatic stakes considerably. The President followed this meeting with a conversation with Israeli Prime Minister Benjamin Netanyahu, deepening coordination between the two countries as Israel prepares for a broader offensive targeting Iran’s nuclear infrastructure.

Strategic Air Superiority and Shifting Military Dynamics

Israeli forces claim to have gained control of the skies over Iran, largely due to US-supplied equipment. According to satellite imagery and UN nuclear watchdog assessments, Israeli strikes have damaged key facilities, including underground enrichment sites at Natanz. The Fordow site, another critical Iranian nuclear facility, has so far escaped damage, though it remains a top target.

Defense Minister Israel Katz warned Tehran that “very significant targets” in the capital were next in line, urging civilians to evacuate. In tandem, Iranian officials announced they are preparing a “punitive operation” and threatened to strike US military bases in the region should Washington proceed with a direct offensive.

The exchange has already caused severe casualties. More than 200 people have been reported killed in Iran, and at least 24 deaths have occurred in Israel, alongside hundreds of injuries. Iran’s ability to retaliate, however, is constrained. Proxy forces across Lebanon, Syria, and Iraq—long used by Iran to project regional power—have suffered substantial degradation since late 2023, limiting Iran’s retaliatory channels.

Trump's Policy Calculus: Pressure, Retaliation, and Military Leverage

Trump’s administration appears to be leveraging maximum pressure to isolate Iran diplomatically while maintaining the option of military force. The presence of the USS Nimitz carrier strike group en route to the Gulf reinforces this strategy, signaling readiness without committing to immediate action. Vice President JD Vance emphasized that multiple policy tools remain available, reaffirming the administration's stance that Iran will not be permitted to enrich uranium for weapons purposes.

The administration has not fully abandoned diplomatic options. Trump indicated that senior officials, including envoy Steven Witkoff or VP Vance, might still engage in direct talks with Iran—though no timelines have been disclosed. The dual posture of coercion and conditional diplomacy reflects the complexity of balancing deterrence with crisis de-escalation.

Geopolitical Fallout and Economic Ripples

The deteriorating situation has reverberated globally, particularly through energy markets. Oil prices surged to their highest level in nearly five months, reflecting fears of supply disruptions. Israel’s Oil Refineries Ltd. was forced to shut down after a strike killed three employees, compromising a facility that handles up to 200,000 barrels per day.

More broadly, concerns have resurfaced about the vulnerability of the Strait of Hormuz—a chokepoint through which roughly one-fifth of the world’s crude oil supply flows. While Iran has not initiated a blockade, the risk has grown. In response, Qatar instructed liquefied natural gas tankers to wait outside the strait as a precaution.

The situation also impacted financial markets, with US equities declining as traders braced for the potential expansion of conflict. The shutdown of US diplomatic facilities in Jerusalem and Tel Aviv for the next three days further underscores the growing risk environment.

Diplomatic Uncertainty and a Shrinking Window for Negotiation

Global leaders, including German Chancellor Friedrich Merz, warned that if Iran does not return to the negotiating table, the complete dismantling of its nuclear infrastructure might become a multilateral priority. The comment reflects a possible shift in the transatlantic stance—from urging restraint to accepting force as a policy tool.

Republican voices in the US Senate have also begun to pressure the White House to move decisively. Senator Lindsey Graham has openly called for coordinated attacks on Fordow, arguing that diplomacy has failed and military action is now necessary.

Despite the intensity, some signals suggest that combat may have temporarily subsided. Israeli military officials noted a reduction in missile activity from Iran on Tuesday compared to the weekend. Whether this signals tactical recalibration or a diplomatic opening remains uncertain.

The Middle East is once again at a critical juncture. As Israel steps up its offensive and Iran prepares retaliatory operations, the United States must decide whether to shift from support to direct involvement. Trump’s confrontational tone suggests diminishing patience, but any military escalation risks inflaming a region already on edge. The coming days will likely determine whether this standoff escalates into a broader war—or if a fragile path back to diplomacy can be preserved.

Source: Reuters

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Daily News

[Quick Facts]

1. Japan's exports decline for the first time in eight months due to tariff impact

2. Iran has been preparing for a possible attack on U.S. bases

3. Military action will not end unless Iran's Fordow nuclear facility is destroyed

4. U.S. CBO: "One Big Beautiful Bill Act" will increase the fiscal deficit by US$2.8 trillion

5. U.S. homebuilder confidence falls to lowest level since end of 2022

6. Villeroy de Galhau: ECB needs to be “flexible and pragmatic” in response to Iraq war

7. U.S. retail sales decline for second consecutive month as tariffs and financial concerns dampen consumer spending

[News Details]

Japan's exports decline for the first time in eight months due to tariff impact

Due to U.S. tariff measures exerting pressure on global trade, Japan's exports declined for the first time in eight months, intensifying concerns of a technical recession following the economic contraction earlier this year. The Ministry of Finance reported on Wednesday that May exports fell 1.7% YoY, primarily dragged down by automotive, steel, and mineral fuel sectors. Analysts' median forecast anticipated a 3.7% decline. Imports decreased 7.7% YoY, mainly due to reduced crude oil and coal imports.

The decline in exports and widening trade deficit have heightened fears of a potential second-quarter contraction in Japan's economy, risking a return to technical recession. Domestic consumption remains subdued amid persistent inflation outpacing wage growth. The U.S. has imposed a 25% tariff on imported automobiles and auto parts, along with a 10% tariff on all other Japanese goods. In early June, President Trump doubled steel and aluminum tariffs to 50%. After two months of negotiations, Japanese Prime Minister Ishiba Shigeru failed to reach a trade agreement with Trump during the G7 summit. The 10% U.S. tariff on Japanese goods is set to revert to the 24% rate announced in April starting July 9.

Iran has been preparing for a possible attack on U.S. bases

According to reports from The New York Times, informed U.S. officials indicate that Iran has mobilized missile systems and other military assets, preparing for potential retaliatory strikes against U.S. military installations in the Middle East should the U.S. engage in hostilities with Iran following Israel's escalation. The report states that approximately 36 aerial refueling tankers have been deployed to Europe to support combat aircraft tasked with defending U.S. bases or extending bomber operational ranges, potentially enabling strikes against Iran's nuclear infrastructure.

As Israel pressures the White House for direct involvement in the Iran conflict, U.S. officials are increasingly concerned about the prospect of a broader regional war. They warn that if the U.S. participates in strikes against Iran's critical nuclear sites, such as Fordow, Iran-backed Houthi forces are almost certain to resume attacks on Red Sea shipping lanes. Additionally, pro-Iranian militias in Iraq and Syria may attempt to target U.S. military facilities in those regions. Other officials suggest that Iran might initiate mine-laying operations in the Strait of Hormuz, aiming to trap U.S. naval forces in the Persian Gulf through maritime interdiction tactics.

Military action will not end unless Iran's Fordow nuclear facility is destroyed

On the 17th local time, Israeli National Security Advisor Hanegbi stated that Israel's military operations against Iran will not conclude unless the Fordow nuclear facility is destroyed. Hanegbi emphasized that Israel is maintaining ongoing communication with the U.S. but is not attempting to persuade Washington to join the strike. He asserted that the operational plan is entirely autonomous, encompassing all aspects of the offensive strategy. Reports indicate that Iran's Fordow underground nuclear site is situated approximately 90 meters beneath the surface and houses thousands of uranium enrichment centrifuges. Conventional Israeli weaponry is insufficient to target such a deeply buried facility, and an airstrike to neutralize it would necessitate U.S. military intervention.

U.S. CBO: "One Big Beautiful Bill Act" will increase the fiscal deficit by US$2.8 trillion

According to CCTV News, on June 17th local time, reporters learned that the Congressional Budget Office (CBO) released a comprehensive analysis indicating that, after accounting for macroeconomic effects, the Trump administration's tax reform and budget legislation are projected to increase the federal deficit by US$2.8 trillion over the next decade. The report incorporates debt service costs, revealing that the legislation will elevate interest rates and add US$441 billion in interest expenses based on federal debt baseline forecasts. Earlier this month, the CBO issued a static scoring analysis estimating that the administration's proposals would generate trillions in tax cuts and spending reductions, but also result in a US$2.4 trillion deficit increase over ten years and cause an additional 10.9 million Americans to lose health insurance coverage.

U.S. homebuilder confidence falls to lowest level since end of 2022

U.S. homebuilder confidence plummeted to its lowest level since December 2022, as elevated mortgage rates and concerns over tariffs and economic stability deter prospective buyers. The National Association of Home Builders (NAHB) and Wells Fargo jointly reported a decline of 2 points in the overall market index to 32, below economists' expectations of 36. The index's three components all declined, with the current sales index reaching its lowest point since 2012. Metrics measuring prospective buyer traffic and future sales outlook over the next six months also hit over-one-year lows.

Villeroy de Galhau: ECB needs to be “flexible and pragmatic” in response to Iraq war

European Central Bank Governing Council Member and Banque de France Governor Francois Villeroy de Galhau stated on Tuesday that following the outbreak of the Israel-Hamas conflict, the ECB must adopt a more flexible approach to monetary policy implementation.

Villeroy de Galhau noted that after the ECB lowered interest rates to 2% this month, the institution remains in a favorable position. However, he emphasized that the escalation of Middle Eastern tensions has led to a significant surge in oil prices, increasing uncertainty in the outlook.

Will core inflation be influenced by commodity price fluctuations and the spillover effects of oil prices? Villeroy de Galhau addressed this at the Financial Times Global Borrowers and Bond Investors Forum in London.

He further added that the ECB must adopt a more "flexible and pragmatic" approach than ever before.

U.S. retail sales decline for second consecutive month as tariffs and financial concerns dampen consumer spending

U.S. Department of Commerce data released on Tuesday indicates that May's nominal retail sales declined by 0.9% MoM, marking the largest decrease since the beginning of the year and primarily driven by automotive sector weakness. April's figures were revised downward to a 0.1% decline, representing the first consecutive monthly decline since late 2023.

Among the 13 retail categories analyzed, seven experienced declines, with notable contractions in building materials, gasoline, and motor vehicle sales. Expenditures at restaurants and bars registered the steepest drop since early 2023, remaining the sole service sector category within the retail report to show a decline.

Consumers preemptively purchased automobiles and other goods ahead of President Trump's tariff implementation, yet recent data indicates a pullback in discretionary spending. While tariffs have not yet significantly fueled inflation in the U.S., consumer confidence remains fragile, and household financial stability is deteriorating due to persistent increases in living costs and elevated interest rates.

Data shows that the control group's sales grew by 0.4% in May, driven by gains in sporting goods, furniture, and apparel. This metric excludes food service, auto dealerships, building material stores, and gas stations.

[Today's Focus]

UTC+8 14:00 UK May CPI

UTC+8 15:30 ECB Executive Board Member Elderson Speaks

UTC+8 16:45 ECB Governing Council Member Escriva Speaks

UTC+8 17:30 ECB Governing Council Member Villeroy Speaks

UTC+8 20:30 U.S. May New Residential Construction Annualized Starts

UTC+8 23:00 ECB Chief Economist Lane Speaks

UTC+8 23:15 Bank of Canada Governor Macklem Speaks

UTC+8 02:00 Federal Reserve June Monetary Policy Decision

UTC+8 02:30 Fed Chairman Powell Holds a Press Conference on Monetary Policy

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US Tariffs Weigh Down Japan’s Trade Outlook

In May 2025, Japan’s total exports declined by 1.7% compared to the same period last year, breaking an eight-month streak of growth. The decline, though smaller than the forecasted 3.8% drop, highlights the immediate impact of aggressive US trade measures, especially on Japan’s automobile industry. The 25% tariff imposed by the United States has directly affected one of Japan's most export-dependent sectors and introduces severe risks to broader economic momentum.

The downturn is most visible in Japan’s trade with its key partners. Exports to the United States fell by 11.1%, while shipments to China declined by 8.8%, reflecting not only the direct consequences of tariffs but also an overall cooling of global demand. Despite these setbacks, Japan managed a smaller-than-expected trade deficit of 637.6 billion yen ($4.39 billion), better than market expectations of nearly 893 billion yen.

Auto Sector at the Heart of Tariff-Driven Decline

Japan’s auto exports, which account for approximately 28% of its total shipments to the United States, are bearing the brunt of the tariff fallout. These vehicles are now subject to a 25% penalty, with an additional 24% 'reciprocal' tariff set to take effect on July 9 unless bilateral negotiations achieve a breakthrough. The escalation poses a significant obstacle to Japan’s industrial recovery, especially as manufacturing output has struggled to gain consistent traction over the past year.

The rush of exports earlier this year—motivated by fears of future tariff enforcement—appears to have front-loaded US-bound shipments, temporarily inflating figures but now contributing to the sharp pullback seen in May.

Macroeconomic Vulnerabilities Deepen

The export contraction arrives at a critical juncture for Japan’s economy. With GDP shrinking in the first quarter due to sluggish private consumption, the new external shock from tariffs risks pushing the economy toward a prolonged stagnation. Economists from the Japan Research Institute warn that should the full suite of proposed tariffs be implemented, US-bound exports could drop by 20–30%, potentially shaving up to 1 percentage point off Japan’s GDP.

This prospect not only affects short-term growth projections but also threatens structural recovery. A contraction in one of Japan’s most globally competitive sectors—autos—could cascade into broader industrial slowdowns, layoffs, and suppressed household spending.

BOJ’s Policy Constraints Grow Tighter

The Bank of Japan finds itself constrained in its ability to respond. On Tuesday, it held interest rates steady and announced a slower-than-expected reduction in its balance sheet beginning next year. This cautious stance underscores the central bank’s dilemma: inflation remains muted, growth is stalling, and monetary tools have limited remaining firepower after a decade of stimulus.

The threat from tariffs exacerbates this challenge. Any resulting downturn would likely push the BOJ to delay normalization even further, locking it into a reactive position with limited leverage to stimulate growth or anchor expectations.

Trade Diplomacy and Domestic Stakes

Prime Minister Shigeru Ishiba's administration is under pressure to deliver a diplomatic resolution with Washington. However, no deal has yet been struck with President Trump, whose trade policy increasingly targets long-standing US allies with sector-specific levies. Japan’s government is reportedly lobbying hard for exemptions, but time is running out as the July 9 deadline for expanded reciprocal tariffs nears.

The structural dependency on the US market, combined with a highly concentrated export profile, reveals a broader strategic vulnerability in Japan’s trade model. Without diversification or protection, any deterioration in US trade relations quickly translates into macroeconomic strain.

Japan’s first export contraction in eight months reflects more than just a cyclical slowdown—it reveals the real economic damage already being inflicted by trade protectionism. With US-bound auto exports plummeting and broader manufacturing under threat, Japan’s policymakers face a dual challenge: restoring external trade flows while managing a precarious internal recovery. If diplomatic efforts fail and tariffs persist, the country’s economic recovery could be significantly derailed, setting back growth and complicating the Bank of Japan’s already cautious exit from ultra-loose monetary policy.

Source: Reuters

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Dollar Holds Firm as Geopolitical Tensions and Fed Decision Shape Market Sentiment

Dollar Resilience Driven by Safe-Haven Demand

Yen and Euro Under Pressure from Energy and Risk Exposure

Central Bank Divergence and Global Trade Pressures

Source: Reuters

China’s Subsidy-Fueled Consumption Surge Exposes Fragility of Stimulus Strategy

Retail Rebound Driven by Stimulus Pushes Policy Limits

Structural Strain Emerges as Funds Run Dry

Manipulation and Arbitrage Complicate Rollout

Retail Revival Amid Broader Economic Uncertainty

Fiscal Pressures Narrow Policy Options

Source: Reuters

Goldman Sachs Restructures Asia Operations to Capitalize on Regional M&A and Capital Market Momentum

Strategic Overhaul Aims to Unify and Strengthen APAC Investment Banking

M&A and Equity Market Recovery Presents Strategic Entry Point

Performance Metrics Signal Competitive Gains

Reshaped Structure to Offset Geopolitical and Policy Risk

Source: Reuters

Oil Prices Stabilize Near 5-Month High as Middle East Conflict Threatens Global Supply Chain

Rising Tensions Sustain Oil Price Surge

Strait of Hormuz: The Market’s Pressure Point

Market Volatility and Investor Behavior Intensify

Crude Inventories Shrink Sharply in the US

Geopolitical Stakes: Strategic Signals from Israel, Iran, and the US

Source: Bloomberg

Middle East Crisis Deepens as Trump Weighs Military Options Against Iran

US Edges Closer to Military Engagement Amid Escalating Middle East Tensions

Strategic Air Superiority and Shifting Military Dynamics

Trump's Policy Calculus: Pressure, Retaliation, and Military Leverage

Geopolitical Fallout and Economic Ripples

Diplomatic Uncertainty and a Shrinking Window for Negotiation

Source: Reuters

Tariff Impacts Compounded by Geopolitical Risks: Global Economy Faces Multiple Challenges

[Quick Facts]

[News Details]

[Today's Focus]

Japan’s Export Decline Signals Deepening Strain from US Tariffs on Automobiles

US Tariffs Weigh Down Japan’s Trade Outlook

Auto Sector at the Heart of Tariff-Driven Decline

Macroeconomic Vulnerabilities Deepen

BOJ’s Policy Constraints Grow Tighter

Trade Diplomacy and Domestic Stakes

Source: Reuters

Risk Disclosure