Foreign Exchange Commentary

Summary

• Canadian bonds slide after strong Canada jobs data, Bank of Canada interest rate cut premium fades and Canadian dollar initially strengthens sharply before rebounding.
• Euro currency has remained in a broad $1.1650 to $1.1850 range since June 25^th.
• U.K. pound sterling extends losing streak on British growth data miss as U.K. economy surprisingly contracts.
• U.S. Treasury yields stable around 4.4% on the 10-year bond after dipping below 4.2% to start the month of July.
• U.S. dollar implied volatility drops for a third day to one-month lows.
• Japan’s yen underperforms major peers after renewed tariff threats. Yen-yuan divergence shows Japanese election, and tariff angst.
• Mexico’s peso remains in tight range of 18.55 to 18.75 thus far in July.
• U.S. weekly jobless claims +227,000 in July 5 week; estimate +235,000.
• President Trump plans to impose blanket tariffs of 15% to 20%.
• Trump tariffs boost outlook for hold in Brazil rates according to BNP Paribas economist for Latin America and Banco Do Brasil's former deputy governor Fernanda Guardado. Brazil’s real extends losses, sinks 1.6% Thursday on Trump tariffs.
• U.S./China agree to boost talks at all levels: Wang Yi.

Noteworthy

• U.S. Dollar Climbs Modestly Amid Tariff Threats
• Trump Hits Canada With Tariff Warning

President Trump’s threat of a 50% tariff on Brazilian imports expanded his use of punitive duties over matters that have nothing to do with trade, breaking with more than a half a century of global economic precedent say some.

Trump cited the trial of the president’s close political ally, former Brazilian President Jair Bolsonaro, as the rationale for new tariffs set to take effect Aug. 1 on imports from the largest economy in Latin America.

It is one of the latest — and perhaps most brazen — examples of Trump using tariffs as a cudgel for political priorities outside of trade. In January, he threatened tariffs on Colombia over repatriation fights for migrants back to that country. Then he imposed steep duties on Canada, Mexico, and China over their role in the fentanyl trade and threatened hefty tariffs on countries that buy oil from Venezuela. He has also used the threat of tariffs to attempt to secure more military spending from Asian nations such as Japan and South Korea.

On Thursday evening, in a new letter to Canada’s leader, Trump said the U.S. would impose 35% tariffs on some Canadian imports starting Aug. 1, citing the fentanyl crisis among other grievances with the country.

President Trump is betting that he threat of reducing access to the American consumer will force nations to capitulate on his political priorities. But he risks getting rebuked by the courts, and political blowback if prices for goods rise.

These moves have shaken the global trade order established in the 1940s, when market economies sought to put tariffs and trade among them on a stable footing. 

Although often controversial and sometimes volatile, such as when the Smoot-Hawley Act hiked U.S. tariffs in 1930, tariffs have generally been motivated by economic or domestic political goals. For twisting the arm of another country, usually a geopolitical adversary, trade embargoes were often used, such as when Napoleon tried to cut off Britain from all trade with continental Europe, or when the U.S. cut off Japan’s access to American oil in 1940 to punish the country for expansionism.

After World War II, the U.S. led an international effort to build a rules-based trading order that kept politics out of tariffs. The General Agreement on Tariffs and Trade (GATT), signed in 1947, required countries to stick to agreed tariffs and not discriminate against imports from other nations. Its core principles were adopted by GATT’s successor, the World Trade Organization, in the 1990s.

The rise of China as a state-backed export juggernaut and the decline of manufacturing jobs in Western countries have undermined the consensus for the post World War trading order.

Since 2010, China has pioneered the use of trade restrictions to punish other countries over political issues unrelated to trade. Among other incidents, China slapped heavy tariffs on Australian wine and barley after Australia called for an international inquiry into the origins of COVID-19.

European Central Bank Could Stay Cautious on Rate Cuts Even as Euro Currency Rises
While the euro currency has strengthened markedly in 2025 it has seen less appreciation since April after President ‘Liberation Day’.  Fearing a reversal the ECB could include this as a factor in monetary policy decision making contingent upon potential moves in U.S. interest rates.

The dollar could weaken if President Trump’s pick to become the next Federal Reserve chair bows to his demands to lower interest rates, MUFG Bank said in a note.

The Wall Street Journal reported earlier this week that Kevin Hassett, one of Trump’s closest economic advisors, is emerging as a serious contender to be the next Fed chair. Hassett has recently stated there is no reason the Fed shouldn’t cut rates. But he would be viewed “as more of a yes man” for Trump, Hardman says. “A development that could increase downside risks for the dollar in the year ahead.” The DXY dollar index trades flat at 97.563.

Canada Jobs Report Exceeds All Expectation
The Canadian dollar pared ‘tariff’ losses versus the U.S. dollar Friday morning after Canada’s job report surprised to the upside.  Canadian yields also climbed to a session high.  Specifically, Canada created 83,100 new jobs last month, beating all estimates, with June unemployment falling to 6.9% versus 7% in May.