US Dollar Drops On Rate Cut Outlook; Yen Down Amid Political Uncertainty In Japan

Economic

Forex

Summary:

The U.S. dollar fell on Monday, extending losses after Friday's weak U.S. jobs report that reinforced expectations of a Federal Reserve rate cut this month, while the yen fell broadly after Japanese Prime Minister Shigeru Ishiba announced his resignation over the weekend.

The focus for markets will also be on French Prime Minister Francois Bayrou's confidence vote later in the day, which he is expected to lose. The announcement of the vote, which Bayrou himself called, has plunged the euro zone's second-largest economy deeper into political crisis.In Japan, Ishiba on Sunday said he would step down, ushering in a potentially lengthy period of policy uncertainty for the world's fourth-largest economy, the most heavily indebted industrialised nation.

That pushed the yen lower across the board and by mid-morning trading, the dollar was just up 0.2% against the Japanese currency at 147.695 after rising by as much as 0.8% on the day.

The Japanese currency similarly slid to its lowest in more than a year against the euro , which rose 0.3% on the day to 173.25 yen.But the market's attention remained firmly pinned on the U.S. dollar after a non-farm payrolls shock on Friday that all but cemented the Fed cutting interest rates at a policy meeting later this month.

"The driving force in the foreign exchange market remains the dollar and U.S. developments," said Marc Chandler, chief market strategist, at Bannockburn Forex in New York.

"People can talk about Japanese politics, but the real driver of dollar/yen is not Japanese politics, or Japanese interest rates. It's U.S. interest rates, and with the market pricing in about a 10% chance of 50 basis point cut, the dollar is falling."

Fed funds futures are pricing in a 90% chance of a standard 25 basis-point cut this month and a 10% chance of 50-bp rate decline, according to LSEG estimates.

The nonfarm payrolls report showed U.S. job growth plunged in August and the unemployment rate increased to nearly a four-year high of 4.3%.

Japan's Political Future

Investors are focusing on the chance of Ishiba being replaced by an advocate of looser fiscal and monetary policy, such as Liberal Democratic Party veteran Sanae Takaichi, who has criticised the Bank of Japan's interest rate hikes.

"The probability of an additional rate hike in September was never seen as high to begin with, and September is likely to be a wait-and-see," Hirofumi Suzuki, chief currency strategist at SMBC, said of the BOJ's next move

"From October onwards, however, outcomes will in part depend on the next prime minister, so the situation should remain live."Japanese stocks surged while government bonds (JGBs) were steady, though yields on super-long JGBs hovered near record highs.The yen hardly reacted to data on Monday showing Japan's economy expanded much faster than initially estimated in the second quarter.

In other currency pairs, sterling edged up 0.2% against the dollar to $1.3534, having risen more than 0.5% on Friday, while the euro rose 0.2% to $1.1741, after hitting a more than one-month high on Friday.

The dollar index edged down 0.3% to 97.6, having tumbled more than 0.5% on Friday.

Against the Swiss franc, the dollar fell to its lowest since July 24, and was last down 0.5% at 0.7938 .

"(The payrolls report) has resulted in the dollar index falling back below support at the 98.000-level although the negative impact on the U.S. dollar is more modest than implied by the drop in short-term U.S. yields," MUFG currency strategist Lee Hardman said in a note on Monday.

Also last Friday, U.S. Treasury Secretary Scott Bessent called for renewed scrutiny of the Fed, including its power to set interest rates, as the Trump administration intensifies its efforts to exert control over the central bank.

President Donald Trump is considering three finalists to replace Fed Chair Jerome Powell, whom he has criticised all year for not cutting rates as he has demanded.

Elsewhere, the Australian and New Zealand dollars each rose 0.5% to $0.6585 and $0.5926, respectively.

Source: Kitco

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Adam

Economic

Central Bank

The European Central Bank is set to hold interest rates steady for a second straight meeting on Thursday, with investors watching for any hints that the bank is done with cutting them.

A hawkish tone from ECB chief Christine Lagarde in July dented market expectations for further moves. A U.S.-EU trade agreement followed and the economy is holding up, so Frankfurt has little need to act now.

"Right now they're quite comfortable staying put," said Zurich Insurance Group's chief market strategist Guy Miller.

Here are five key questions for markets:

1/ What will the ECB do on Thursday?

Leave its key rate on hold at 2%.

Inflation has been slightly higher than expected since the last meeting and first-quarter growth was double ECB expectations, while the trade deal with the United States has reduced uncertainty. So policymakers have little reason to either cut rates now or signal what's next.

"They wanted to be deliberately uninformative about future interest rate decisions. So overall, that's what we'll get," said HSBC chief European economist Simon Wells.

Are we done already? Five questions for markets ahead of ECB_1

The line chart shows the ECB's deposit policy rate from Jan. 1999 to August 2025, with rate-cutting cycles highlighted.

2/ Does the EU-U.S. trade deal change the economic outlook?

At first glance, not much.

The EU's 15% tariff deal is not far off from the ECB's baseline 10% expectation, Lagarde says.

Some economists caution the tariff hit to the economy remains uncertain and will increasingly feed through in the months ahead. Further escalation is also a risk.

"I would be a bit more critical or sceptical about the deal than the ECB will probably be in its meeting," said ING's global head of macro Carsten Brzeski.

Are we done already? Five questions for markets ahead of ECB_2

The line chart shows annual GDP growth rate and annual HICP inflation with, projections using dotted lines, for the euro zone. In the short term, inflation is projected to fall while growth is expected to rise.

3/ Is the ECB done cutting rates this cycle?

Not necessarily. Several policymakers have not ruled out another move and the ECB is divided on whether inflation will tick lower or higher than expected.

Economists polled by Reuters reckon the ECB is done. Traders see around 70% chance of one more cut, but only by next summer.

Those who reckon the ECB is done say Lagarde set a high bar for further moves and the outlook will need to deteriorate to warrant one. Some expect a hike next given German stimulus.

But a bigger-than-expected growth hit from tariffs, bond market stress, U.S. rate cuts pushing the euro higher and inflation even lower are reasons that cuts could resume, others say. The ECB sees inflation falling well below its target next year.

Are we done already? Five questions for markets ahead of ECB_3

The graphic is a line chart showing the ECB deposit rate and the market implied rates on July 23, 2025 and Sep. 4, 2025 in blue and red respectively. Implied rates for Sep. are higher.

The central bank's updated economic projections are also in focus. Economists broadly expect slight upgrades to 2025 growth and inflation projections, but are more divided on next year.

4/ What does France's political turmoil mean for the ECB?

It's another source of uncertainty, but too early to influence policymakers' thinking.

France's government is likely to lose a confidence vote on Monday as it tries to gather support for unpopular belt-tightening measures.

If markets become more stressed, there may be a renewed focus on whether the ECB might buy bonds using its Transmission Protection Instrument scheme designed to support countries whose debt comes under pressure through no fault of their own - which is hard to say for France.

A snap election could widen the French/German 10-year bond yield spread to around 90 basis points from 76 now , analysts say.

But similar levels last year did not see the ECB deploy TPI and there was no major contagion to other countries that might make it more likely to act.

Are we done already? Five questions for markets ahead of ECB_4

The graphic is a line chart showing the spread between the 10 year bond yield of France and Germany since 2010. The spread has increased in the last year.

5/ Is the ECB worried about central bank independence?

For sure. The U.S. administration attempting to remove Federal Reserve chief Jerome Powell or governor Lisa Cook would pose a "very serious danger" to the global economy, Lagarde says.

The Fed yielding to demands for lower rates could stoke inflation, and tighter financial conditions spilling over to the euro zone, and push the euro even higher, policymakers and economists warn.

"It's about financial stability; that's what would be at risk without an independent Fed," said Zurich's Miller.

Source: Reuters

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Adam

Economic

For US dollar, the main focus last week was the August nonfarm payrolls data, which reported only 22,000, significantly below the market’s expectation of 75,000. After revisions, the average employment growth over the past three months remained at just 29,000, with figures under 100,000 for four consecutive months, highlighting ongoing labor market weakness. The unemployment rate rose to 4.3%, its highest since October 2021, further underscoring this trend.

Additionally, wage growth has slowed. Average hourly earnings increased by 0.3% month-over-month, while the annual increase rate decelerated to 3.7%. These figures suggest that inflationary pressures have lessened as wage growth slows. The markets have started to more clearly reflect the loss of momentum in economic activity following the labor market’s weakening.

Fed Rate Cut Expectations Increase

The most tangible impact of the labor market’s weakening is seen in expectations for the Federal Reserve. Following the August data, a 25-basis point interest rate cut this month is almost certain, with a stronger 50-basis point cut also being considered. Expectations for at least two rate cuts by the end of the year are gaining momentum.

This anticipation is already influencing bond yields. The 2-Year yield has dropped to 3.51% and the ten-year yield to 4.07%, reflecting increased demand for safe-haven assets in the markets. This scenario suggests that the global depreciation of the US dollar may continue if the Fed begins to cut interest rates.

US Dollar Outlook

The US dollar retreated to 97.43 following the employment data, marking an important support level the index tested throughout August. A sustained break below 97 could signal global selling pressure and drive the index to lower levels.

Over the past three months, the US dollar index has been consolidating, staying within the mid-range of its channel. Daily closes below an average of 97.50 will strengthen signs of a weakening US dollar, potentially pushing the index toward its main support at 96.50.

Conversely, upcoming inflation data will play a crucial role in determining the US dollar’s short-term direction. A higher-than-expected inflation figure could trigger a temporary rebound in the US dollar index. Specifically, a monthly increase above 0.3% in headline inflation might temper interest rate cut expectations, potentially pushing the index back above 98. However, the 99-100 range remains a strong resistance zone; if the index cannot surpass this level, any gains may be limited.

Inflation Data in Focus

The upcoming releases of the producer and consumer price indices will be pivotal in shaping the Federal Reserve’s decision-making at the September meeting. If core inflation remains at 0.3% monthly, it would suggest persistent price pressures, prompting the Fed to take a more cautious approach in easing. Conversely, lower-than-expected inflation might bolster risk appetite by increasing the likelihood of a substantial 50-basis-point rate cut.

Global markets are already leaning toward riskier assets following the weak employment data. There’s a noticeable increase in buying interest in US futures and a slight recovery in emerging market currencies, indicating that the US dollar’s short-term weakness is enhancing risk appetite across global markets.

Currently, the US dollar index is influenced by uncertainties surrounding the Fed’s rate cut strategy. While weak employment data weighs against the US dollar, the trajectory of inflation will be crucial in determining the pace and sustainability of this trend. The 97 region serves as a key support level; a sustained drop below could push the index into a broader downtrend. On the flip side, if inflation surprises to the upside, the US dollar could rebound toward the 98.5-100 range in the near term.

In summary, the US dollar index’s immediate focus is on the upcoming inflation data. While the weakening labor market could prompt the Fed to accelerate rate cuts, potential inflationary pressures may restrict the US dollar’s depreciation. Thus, inflation indicators will be the key data determining the market’s short-term direction.

Source: investing

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Adam

Economic

New Delhi is proceeding with caution after President Donald Trump appeared to soften his tone against India following weeks of tensions between the two nations marked by the US’s 50% tariffs on goods from the South Asian country.

Trump said at the White House on Friday there was “nothing to worry about” with US-India ties and the two countries had a “special relationship.” He called Narendra Modi a “great prime minister” and said he would always be friends with him. Modi responded hours later with a post on X, saying he “deeply” appreciated and reciprocated the sentiments.

The Indian leader cannot be seen rushing to embrace Trump too quickly given the domestic politics pressure. Modi is already under fire from the opposition, which has accused him of capitulating to Washington after his early overtures to Trump failed to secure better tariff terms. Congress party President Mallikarjun Kharge sharpened the attack over the weekend, calling Modi a “failure in foreign policy.”

Shashi Tharoor, another senior Congress leader, said Sunday that while he welcomed Trump’s softer tone, India cannot “forget either the 50% tariffs or the insults that have accompanied it,” adding that serious repair work is needed from both sides.

“Trump has a fairly mercurial temperament and what he has been saying has caused some hurt and offense in our country,” Tharoor said, according to ANI.

Trump upended decades of US diplomacy by slapping 50% tariffs on India in August to punish the country for its trade barriers and buying oil from Russia. The US president has accused India of funding Russian President Vladimir Putin’s war on Ukraine through the oil purchases, thereby undermining the US’s efforts to clinch a peace deal between the two sides.

Source: Bloomberg

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Thomas

Economic

It seemed like a good idea at the time. Call a bill “big and beautiful,” repeat the name again and again, and watch the good reviews roll in. Well, that hasn’t happened with President Donald Trump’s signature piece of legislation, which he signed into law on Independence Day.

Not even close.

Trump, who at the time claimed that the bill “was the singular most popular bill ever signed,” now seems to prefer to talk about anything else, leaving the selling to Vice President JD Vance and Treasury Secretary Scott Bessent.

The law is polling badly, both because of Democratic attacks and the reality that the bill really is a transfer of wealth from the poor to the rich. According to KFF, some 46% of adults say the law will hurt them and their family, including 53% of independents.

The president wants a mulligan. It’s out with the old branding and in with the new.

“So the bill, I’m not gonna use the term, ‘great big beautiful bill,’ that was good for getting it approved, but it’s not good for explaining what it’s all about,” Trump said last month. “It’s a massive tax cut for the middle class.” According to the Congressional Budget Office’s analysis, it’s not quite that simple. The poorest Americans will see a $1,200 a year decrease in their income because of cuts to social services like Medicaid and SNAP and middle-income households will see a gain of $800-1,200 a year. The nation’s richest will see a $13,600 boost to their incomes.

But voila, the bill is now supposed to be called the “Working Families Tax Cut Bill” or the “Working Families Tax Plan.” This, after Team Trump huddled with House Republicans last week in a briefing oddly called “Love at First Vote,” according to the New York Times. (More bad branding.)

The hope is that calling the bill by another name will make it smell sweeter: two-thirds of Americans view it unfavorably.

The numbers suggest that their worry isn’t misplaced. Large swaths of the public will take an economic hit because of the bill. According to the CBO, more than a million people will lose health insurance because of changes to Medicaid and to the Affordable Care Act subsidies. One of the most touted provisions, no taxes on tips, would benefit roughly 2% of all households, with a tax cut of $200 to $1,700 according to the Yale Budget Lab.

The administration has forecast an economic boom, even as the latest jobs numbers suggest an economic malaise.

“The ‘One Big Beautiful Bill,’ which has full expensing for factories and equipment, was passed on July 4th,” said Treasury Secretary Scott Bessent, on NBC’s “Meet the Press,” not yet calling the bill by it’s preferred name. “Many companies were holding back then. So, we are going to see construction jobs. And we are going to see manufacturing jobs.”

Secretary of Commerce Howard Lutnick had a similarly rosy forecast, touting the investments and tariff money as a coming boost to the economy.

“This is going to be the greatest growth economy, six months from now, a year from today as these trillions of dollars of plants and factories, you’ve seen all these pictures,” said Lutnick on CNBC on Friday. “There are just so many factories going in. The employment situation is going to be so impressive.”

Trump has been sounding a similar theme, promising a new golden age ahead.

“We’re going to win like you’ve never seen,” Trump said Friday. “Wait until these factories start to open up that are being built all over the country, you’re going to see things happen in this country that nobody expects.”

The operative words here are “six months from now” and “wait.”

On the manufacturing jobs front, anything would be an improvement. According to the latest jobs report, manufacturing jobs decreased by 12,000 in August and are down by 42,000 since April, when Trump announced tariffs. Overall, the unemployment rate rose to 4.3%, with just 22,000 jobs added last month.

And affordability is still an issue for Americans, as consumer prices continue to rise, with energy rising at double the rate of inflation. Some 53% of those surveyed say that the cost of groceries is a major stress, with 33% saying it’s a source of minor stress, according to an AP/NORC poll last month. The cost of housing is a major stress for 47% and a minor source of stress for 27%, according to the poll. Among adults under 45 who are stressed about groceries, 19% are using buy-now-pay-later services to defer payments. And according to a CBS/YouGov poll, 65% of American adults say that Trump’s policies are making food and grocery prices go up.

Put simply, costs and personal debt are creeping up, and Americans are finding it harder to get ahead. Rebranding a bill is easy. Rebranding people’s everyday experiences of the economy is much harder. Just ask Joe Biden.

Source: Bloomberg Europe

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Winkelmann

Economic

Forex

Political

Late last December, Canadian businessman Kevin O’Leary, affectionately known as Mr. Wonderful, re-opened a longstanding public debate over the idea of “continentalism” in North America.

Within weeks after the re-election of President Donald Trump, O'Leary pitched the merits of an EU-style economic union between Canada and USA.

“I like this idea and at least half of Canadians are interested” he said.

Unfortunate Timing

As it happened, the timing of O’Leary’s proposal could not have been worse.The credibility of his idea was instantly undermined by the incoming U.S. President’s controversial insistence that Canada should become the 51st state.After Trump’s inauguration, Washington pivoted to hardball positions on tariffs and trade and it was clear there would be no special concessions for Canada. Signals from D.C. warned of tough USMCA trade negotiations to come.

In March, a beleaguered Justin Trudeau left office and former Bank of England President Mark Carney took over the Liberal Party of Canada. In April, Mr. Carney was elected prime minister, but his party fell short of winning a clear majority in the House of Commons.The new Liberal government immediately adopted an “elbows up” disposition in the brewing trade war with the USA. By the summer of 2025, any talk of a Can-Am economic union was crowded out by strong feelings of resentment and ill will on both sides of the border.

An Idea Worth Revisiting

The idea of an EU-style Can-Am union has a long and respectable history and it is well worth revisiting.After the British North America Act of 1867, Canadian scholar Goldwin Smith led a vigorous philosophical movement that supported closer ties with the USA in the form of a continental economic order. Smith defended the concept in a 1891 book titled “Canada and the Canadian Question.” Opposing movements favoured closer ties with the British Empire or total Canadian economic independence. Neither of the latter positions stood the test of time.

Today, the arguments for the development of a Can-Am union are more compelling than ever. Economic integration, the elimination of trade barriers, and the removal of regulatory mismatches could boost cross-border investment well beyond current USMCA levels. A strong shared currency would eliminate exchange rate volatility, reduce transaction costs, and improve price transparency. EU-style citizen mobility could reduce labour shortages, provide enormous opportunities for young workers, increase productivity, and fill demographic gaps created by aging populations.

Infrastructure and environmental coordination would support integrated transportation systems, energy production, and transnational communications networks. Coordinated pollution policies could establish reasonable emissions standards and enhance environmental protection without obstructing sorely needed drilling, mining, and manufacturing initiatives.A larger unified market with consistent rules would incentivize investors. Harmonized policies would secure critical materials and technologies within North America and reduce dependency on hostile suppliers. A Can-Am union would bring together a population of some 388.8 million on 19.82 million square kilometres of territory with and a combined GDP of close to $32 trillion.

In the realm of education, mutual credential recognition, research collaboration, and professional mobility would multiply opportunities in a North American cultural market that could stand up to the Chinese Communist Party and other global influencers.All in all, a new continental order would increase the geopolitical influence and security of citizens in both Canada and the USA. A unified bloc dedicated to Western democratic principles and free enterprise could rival the economic, diplomatic, and military weight of China, Russia, and other totalitarian regimes.

With a southern border wall already in place, our security could be further improved by a joint force that could act against illegal migration and drug smuggling at the water’s edge. Shared intelligence, cybersecurity, and a coordinated military would bolster North America’s defence systems in what has become a dangerous multipolar world.Modelled after EU governance mechanisms, a North American commission or council could allow for cooperative decision-making without sacrificing national sovereignty. If historical adversaries like Germany, France, Italy, Spain, and Portugal can coexist in an economic union, why not Canada and the United States?

Resistance to Change May be Overcome by Facts on the Ground

As it was in the days of Goldwin Smith, there is still plenty of cross-border resistance to Mr. O’Leary’s continentalist proposal.All manner of entrenched interests regard an economic union as overreach and fear the loss of personal power and control. Big Labour warns of downward pressure on salaries and benefits in an open job market. Canadian politicians fear being overwhelmed in an unbalanced partnership, and American lawmakers are reluctant to support anything that might dilute congressional supremacy.

But facts on the ground are leading to a kinder disposition toward the continental alternative. Among young, ambitious North Americans trapped in a collapsing middle-class there is a powerful yen for greater mobility and the new opportunities that bold change can invoke.

This is especially true on the Canadian side of the border. In 2024 alone, approximately 106,000 Canadians permanently left the country. This figure marked one of the highest outflows in recent memory. Some of the most commonly cited reasons for leaving are the soaring cost of living, low salaries, high taxes, limited career opportunities, and loss of confidence in government institutions. In spite of the anti-American rhetoric constantly served up by Canada’s legacy media, the United States remains the primary destination for departing Canadians. Over a million now live there.

So perhaps it’s time for a second look at Kevin O'Leary’s proposal. As the late British Prime Minister Harold Wilson once asserted: “He who rejects change is the architect of decay. The only human institution which rejects progress is the cemetery.”

Source: Zero Hedge

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Adam

Economic

US job growth in the year through March was probably far less robust than government figures currently show, underscoring a labor market that shifted into a lower gear well before the hiring slowdown this summer.

Economists at Wells Fargo & Co., Comerica Bank and Pantheon Macroeconomics expect the Bureau of Labor Statistics’ preliminary benchmark revision on Tuesday to show the March payrolls count was almost 800,000 less than currently estimated — or about 67,000 a month on average. Nomura Securities, Bank of America Corp. and Royal Bank of Canada say the downgrade could even be closer to a million.

While a dated snapshot of job growth, a substantial downward revision would illustrate a labor market with far less steam last year and reinforce expectations for a series of Federal Reserve interest-rate cuts. A second year of sizable revisions to the employment count also risks drawing the ire of President Donald Trump, who has criticized the accuracy of BLS data.

Another US Jobs Markdown Sets Stage for Fed Cut, BLS Criticism_1

Once a year, BLS benchmarks the March payrolls level to a more accurate but less timely data source called the Quarterly Census of Employment and Wages, which is based on state unemployment insurance tax records and covers nearly all US jobs. That’s in addition to the revisions it conducts in each month’s jobs report, all of which ultimately make the data more accurate.

“A big downward revision to job growth through March 2025 would have less implications for monetary policy than a downward revision to job growth in the most recent months, but it does set the stage for the broader context of how the economy has been doing,” said Bill Adams, chief economist at Comerica. “And all things equal, downward revisions to job growth increase pressure on the Fed to ease policy.”

It would also embolden those who say the Fed should have started easing policy months ago. Fed Governor Christopher Waller, who voted in favor of a rate cut at the central bank’s last meeting in July — when officials chose to hold rates steady instead — said he expects the benchmark revisions to reduce payrolls growth by an average of about 60,000 a month. Policymakers are already widely expected to lower borrowing costs at their meeting next week.

Political Implications

Though the revisions wouldn’t change the current understanding of the labor market, they would suggest the step-down in hiring seen in recent months actually began much earlier. The Trump administration could point to Tuesday’s number, which is a preliminary estimate for the year through March 2025, as evidence that job growth was weakening well before he took office. The final figure comes out early next year.

“This mostly reflects job creation prior to Trump’s term. So he can argue really that this was a sign that the economy that he inherited was actually much weaker than we all thought,” said Samuel Tombs, chief US economist at Pantheon Macroeconomics.

The data come a month after unusually large downward revisions to monthly jobs data sparked outrage at the White House and prompted Trump to fire the head of the BLS. He took aim not only at those monthly revisions, but also last year’s preliminary benchmark revision, which suggested payrolls would be marked down by the most since 2009.

Another US Jobs Markdown Sets Stage for Fed Cut, BLS Criticism_2

Though Trump has been critical of revisions, both the monthly and benchmark adjustments are part of a routine process of updating estimates as more data become available. Revisions have been bigger in recent years partly due to declining response rates.

Birth-Death Model

For most of the recent years, monthly payroll data have indicated stronger job growth than the QCEW figures. Some economists partly attribute the difference to the so-called birth-death model — an adjustment by the BLS to account for the net number of businesses opening and closing. That calculation has been more difficult since the pandemic.

Others have argued there’s another reason behind the discrepancy: immigration. While the monthly payrolls report doesn’t inquire about citizenship status, the QCEW report utilizes records on unemployment insurance — which undocumented immigrants can’t apply for.

Ultimately, economists and policymakers will use the preliminary benchmark figures to gauge the speed at which the labor market has been decelerating as they await more complete 2025 data released with the government’s final revision in February.

“If I see a significant revision to data from last year, that tells me what the starting off point is,” said Carrie Freestone, an economist at the Royal Bank of Canada. “But what I think Fed officials are going to be most concerned about is the fact that we’re losing momentum — the fact that we’ve likely reached a turning point in the labor market.”