The U.S. dollar has extended its downward trajectory since the beginning of Q2, pressured by growing market caution following President Donald Trump’s announcement of a “broad trade deal” with Japan. Risk appetite for the greenback has diminished, as it becomes increasingly evident that the U.S. administration is leveraging trade policy as a negotiating tool, putting pressure on key partners. This sentiment is reflected in the Dollar Index, which has approached its lowest levels since mid-July.
While markets initially tried to price the U.S.-Japan deal positively, the absence of clear details regarding the long term implications coupled with uncertainty over Federal Reserve policy has reinforced selling pressure on the dollar. Traders remain in a holding pattern ahead of the upcoming Fed meeting and the August 1 deadline for the potential implementation of additional tariffs set by the White House.
The Japanese yen has shown pronounced volatility in recent sessions. It briefly gained on the back of the trade deal, which reduced the proposed tariff rate on Japanese exports from 25% to 15%. However, these gains quickly faded due to internal political concerns most notably, speculation over Prime Minister Shigeru Ishiba’s potential resignation following his party’s poor performance in recent upper house elections.
Technical analysts point to the yen’s sensitivity to political developments as confirmation of its ongoing role as a safe haven currency. However, domestic instability continues to undermine its momentum, limiting investor confidence in the absence of a clear directional trend. Markets are left to determine whether this volatility is temporary or indicative of deeper structural changes in Japan’s economic landscape.
The deal announced by President Trump goes beyond tariff reduction it also includes a Japanese commitment to invest $550 billion in the U.S. economy and to open domestic markets to American exports, including automobiles, agricultural products, and energy. While the agreement may appear balanced on paper, it largely favors the U.S., especially given the lack of any binding commitments to shield Japanese firms from future tariff risks.
Of particular note, as emphasized by Japanese Finance Minister Katsunobu Kato, is the fact that the agreement makes no reference to currency exchange policies. This clarification comes despite market speculation that the U.S. might pressure Japan to strengthen the yen. The clear separation between trade negotiations and forex policy provides temporary reassurance to markets, although the risk of currency manipulation pressure remains in the event of renewed bilateral tensions.
Other Asian currencies traded within narrow ranges, with a slight upward bias in pairs like AUD/USD and NZD/USD, supported by improved sentiment following the U.S.-Japan deal. In contrast, the Chinese yuan remained relatively stable amid cautious intervention from Beijing, while the Korean won outperformed, with the USD/KRW pair falling 0.3% on signs of local economic improvement.
From a technical standpoint, momentum indicators across major currency pairs suggest a slowdown in liquidity, indicating that traders are largely staying on the sidelines ahead of the Fed’s decision. The market is entering a critical phase, in which major global players may redefine trade and monetary policy directions making the coming months pivotal for medium term currency trends.
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