US tariff letters boost dollar, dent risk appetite 

Liberation Date: version 2 

The approval of the US Budget Bill has allowed US President Trump to shift his focus to his second most favorite subject: tariffs. Three months after the April 2 Liberation Day and the show in the Rose Garden, Trump kicked the can down the road by extending the 90-day pause on reciprocal tariffs to August 1.

In the meantime, 14 countries – including Japan and South Korea – received a letter detailing the potential imposition of harsh tariffs, ranging from 24% to 48%, if these nations do not accept Trump’s demands by August 1. Interestingly, the EU and India did not receive a ‘Trump tariff letter’, suggesting that negotiations are underway and the US President is satisfied with the progress made so far.

Market switched to risk-off mode

Upon news that both Japan and South Korea received the Trump letter, the market reacted in a risk-off fashion, with the US dollar receiving a boost and rallying against both the euro and yen. Notably, this reaction differs from the market moves following the April 2 reciprocal announcements. That date marked the start of the dollar’s underperformance, which has led to euro/dollar hovering north of 1.17.

The yen appears to be in trouble, as Japanese PM Ishiba’s determination to protect Japan’s critical sectors is drawing Trump’s ire. Interestingly, Upper House elections will be held on July 20 in Japan. The latest developments could either boost Ishiba’s chances of maintaining the simple majority his party currently holds in the Upper House, or confirm the current low approval ratings, potentially causing Ishiba to lose support and even triggering the collapse of his minority government. Dollar/yen is currently climbing towards the 146.20 area, though a decisive move above 148 is needed to support a bullish breakout.

Meanwhile, equities are slightly on the back foot, although the reaction has been muted, potentially due to the fact that both China and the EU are currently not being targeted by Trump. Gold, though, got a quick boost, rising almost $40 from the $3,300 level, despite the dollar performing relatively well yesterday. Although the precious metal has not been making headlines lately, it remains supported by lingering demand, particularly when it tests the $3,260 area.

Focus on additional letters and headlines about the US-EU progress

Investors will probably remain glued to their screens, looking for any additional countries that might receive Trump’s letter, and information on the US-EU trade negotiations progress. Considering Trump’s style, we cannot rule out the possibility of a brief deterioration in the US-EU relations, engineered by the US President to achieve his objectives.

In the meantime, it won’t be long before Trump shifts his focus to the Fed. One of the rumoured candidates for the Fed Chair position, former Fed Reserve Governor Warsh, is hitting all the right notes. At his latest appearance, he downplayed inflation risks due to tariffs and detailed his vision for a ‘new’ Fed, brought into the 21st century. The credibility of the Fed as an institution is at risk if this process becomes a beauty pageant.

RBA stands pat, maintains dovish stance

Despite potent market expectations, the RBA chose to stand pat, keeping its rates unchanged and essentially opting to wait for more information. Considering the latest developments on the tariff front - with Australia not getting a letter but not completely out of the woods yet - and the much-expected release of the CPI report for the second quarter of 2025 in late-July, today’s decision makes sense.

Notably, the aussie got an unexpected boost, reacting to Monday’s sizeable dollar rally and testing the 0.6548 level again. However, the move is gradually fading, as the RBA remains on an easing path and, if conditions demand it, a stronger rate cut could be delivered on August 12.